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Full text of "S. 1086, the Telecommunications Infrastructure Act of 1993 : hearings before the Subcommittee on Communications of the Committee on Commerce, Science, and Transportation, United States Senate, One Hundred Third Congress, first session, July 14 and September 8, 1993"

S. Hrg. 103-787 

S. 1086, THE TELECOMMUNICATIONS 
INFRASTOUCTURE ACT OF 1993 



Y 4. C 73/3: S. HRG. 103-787 

S. 1086; The Teleconnunications Inf.. 



HEARINGS 

BEFORE THE 

SUBCOMMITTEE ON COMMUNICATIONS 

OF THE 

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 
FIRST SESSION 



JULY 14 AND SEPTEMBER 8, 1993 



Printed for the use of the Committee on Commerce, Science, and Transportation 






DEC 1 6 fed^ 



' -SoiOi^ i'*OtiJiL> uSny^*"'' 




U.S. GOVERNMENT PRINTING OFFICE 
70-334CC WASfflNGTON : 1994 



For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046068-9 



S. Hrg. 103-787 

S. 1086, TTIE TILECOMMUNICATIONS 
INFKASTOUCTURE ACT OF 1993 



Y 4.C 73/3: S. HRG, 103-787 

S. 1086, The Teleconnunications Inf.. 



HEARINGS 

BEFORE THE 

SUBCOMMITTEE ON COMMUNICATIONS 

OF THE 

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 
FIRST SESSION 



JULY 14 AND SEPTEMBER 8, 1993 



Printed for the use of the Committee on Commerce, Science, and Transportation 







DEC 1 6 Ibd^ 



coMii!WTnnpnMavTcncoaoT^(!*-««' 



U.S. GOVERNMENT PRINTING OFFICE 
70-334CC WASHINGTON : 1994 

For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046068-9 



COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ERNEST F. ROLLINGS, South Carolina, Chairman 
DANIEL K. INOUYE, Hawaii JOHN C. DANFORTH, Missouri 

WENDELL H. FORD, Kentucky BOB PACKWOOD, Oregon 

J. JAMES EXON, Nebraska LARRY PRESSLER, South Dakota 

JOHN D. ROCKEFELLER IV, West Virginia TED STEVENS, Alaska 
JOHN F. KERRY, Massachusette JOHN McCAlN, Arizona 

JOHN B. BREAUX, Louisiana CONRAD BURNS, Montana 

RICHARD H. BRYAN, Nevada SLADE GORTON, Washington 

CHARLES S. ROBB, Virginia TRENT LOTT, Mississippi 

BYRON L. DORGAN, North Dakota JUDD GREGG, New Hampshire 

BOB KRUEGER, Texas 

Kevin G. CuhTIN, Chief Counsel and Staff Director 
Jonathan CHAIfflERS, Republican Staff Director 



Subcommittee on Communications 

DANIEL K. INOUYE, Hawaii, Chairman 

ERNEST F. HOLLINGS, South Carolina BOB PACKWOOD, Oregon 

WENDELL H. FORD, Kentucky LARRY PRESSLER, South Dakota 

J. JAMES EXON, Nebraska TED STEVENS, Alaska 

JOHN F. KERRY, Massachusetts JOHN McCAIN, Arizona 

JOHN B. BREAUX, Louisiana CONRAD BURNS, Montana 

JOHN D. ROCKEFELLER IV, West Virginia SLADE GORTON, Washington 
CHARLES S. ROBB, Virginia 

01) 



CONTENTS 



July 14, 1994 



Page 



Opening statement of Senator Breaux 11 

Opening statement of Senator Bums 5 

Prepared statement 5 

Opening statement of Senator Exon 9 

Opening statement of Senator Gorton 5 

Opening statement of Senator Hollings 2 

Opening statement of Senator Inouye 1 

Opening statement of Senator Lott 4 

Opening statement of Senator Packwood 3 

Opening statement of Senator Rockefeller 10 

Prepared statement 10 

Opening statement of Senator Stevens 4 

UST OF WITNESSES 

Burton, Daniel, President, Council on Competitiveness and F*roject Director, 

21st Century Information Infrastructure Project 11 

Prepared statement 15 

Coe, Kermit, Director of Merchant Acceptance Strategy, VISA International ... 53 

Prepared statement 55 

Crowe, James Q., Chief Executive Officer, Metropolitan Fiber Systems 25 

Prepared statement 27 

Cullen, James G., President, Atlantic Bell Corp 92 

Prepared statement 93 

Frischkom, Allen R., Jr., President, Teleconmiunications Industry Associa- 
tion 70 

Prepared statement 72 

Martz, Uzal H., Jr., President and Publisher, Pottsville Republican, on behalf 

of the Newspaper Association of America 102 

Prepared statement 104 

McBee, Gary, Vice Chairman, United States Telephone Association 64 

Prepared statement 66 

Metalitz, Steven J., Vice President and General Counsel, Information Indus- 
try Association 110 

Prepared statement 112 

Nigdi, Michael, Senior Vice President, Entergy Corp 57 

Prepared statement 59 

Roberts, Brian L., President, Comsat Corp 34 

Prepared statement 37 

Smith, James M., President, CompTel 105 

Prepared statement 107 

Ware, Lawrence C, Manager, Garden Valley Telephone Co 42 

Prepared statement 43 

Wright, Dalton C, President, Lebanon F*ublishing Co., representing the Na- 
tional Newspaper Association 97 

Prepared statement 99 

September 8, 1994 

Opening statement of Senator Breaux 136 

Opening statement of Senator Bums 134 

Opening statement of Senator Danforth 131 

(III) 



IV 

PaffB 

Opening statement of Senator Ford 136 

Opening statement of Senator Gorton 201 

Opening statement of Senator Hollings 130 

Opening statement of Senator Inouye 129 

Opening statement of Senator Lott 136 

Opening statement of Senator Mathews 136 

Opening statement of Senator Packwood 137 

Opening statement of Senator Pressler 132 

Prepared statement 133 

Opening statement of Senator Robb 234 

Opening statement of Senator Stevens 135 

UST OF WITNESSES 

Allen, Robert E., Chairman of the Board and CEO, AT&T 138 

Prepared statement 140 

Duke, Eh*. David, Vice Chairman, Coming, Inc 161 

Prepared statement 163 

EasterUng, Barbara J., Secretary-Treasurer, Conmiunications Workers of 

America 222 

Prepared statement 224 

Kapor, Mitchell D., Chairman of the Board, Electronic Frontier Foundation .... 153 

Prepared statement 156 

Kimmelman, Gene, Legislative Director, Consumer Federation of America 212 

Lasher, Gary E., President and CEO, Esistem Telelogics Corp., and Chairman 

of the Board of the Association for Local Telecommunications Services 217 

Prepared statement 219 

Opperman, Vance K., President, West Publishing Co 206 

Prepared statement 208 

Preston, Paula Smith, Vice President of Administration, Hello, Inc 226 

Prepared statement 228 

Ray, William J. Superintendent, Glasgow Electric Plant Board 213 

Prepared statement 215 

Weiss, WiUiam, Chairman, Ameritech Corp 148 

Prepared statement 150 

Appendix 

Allen, Robert E., Chairman of the Board, AT&T, letter from, to Senator 

Inouye and Senator Danforth, dated October 5, 1993 266 

Association of Telemessaging Services, International, prepared statement of ... 260 

Consumer Federation of America, prepared statement of 273 

CuUen, James G., President, Bell Atlantic, letter from, to Senator Inouye, 

dated September 2, 1993 258 

Intermedia Communications of Florida, Inc., prepared statement of 275 

Kimmelman, Gene, Legislative Director, Consumer Federation of America, 

prepared statement of 245 

Kovach, Gerald J., Senior Vice President, External Affairs, MCI Communica- 
tions Corp., letter from, to Senator Inouye, dated September 17, 1993 257 

Levin, James E., Vice President, Government Affairs, Sprint Communications 

Co., prepared statement of 253 

McBee, Gary W., Vice Chairman, Board of Directors, United States Telephone 

Association, letter from, to Senator Inouye, dated July 28, 1993 248 

Metalitz, Steven J., Vice President and Gfeneral Counsel, Information Indus- 
try Association, letter from, to Senator Inouye, dated July 26, 1993 256 

Miller, Dean J., Commissioner, Idaho Public Utilities Commission, prepared 

statement of 237 

Norris, Thomas H., Vice President, Federal Government Affairs, AT&T, letter 

from, to Senator Inouye, dated August 2, 1993 259 

Public Service Commission of the District of Columbia, prepared statement 

of the 251 

Questions asked by Senator Pressler and answers thereto by: 

AT&T 267 

Coming, Inc 272 

Mr. Lasher 274 

Mr. Opperman 270 

Ms. Easterling 277 



V 

Page 

Rush, Tonda R., President and CEO, National Newspaper Association, letter 

from, to Senator Inouye, dated July 28, 1993 251 

Squadron, William F., Department of Telecommunications and Energy, City 

of New York, prepared staten^nt of 242 

Sturm, John F., Senior Vice President, Government, Legal and Ptiblic Policy, 
Newspaper Association of America, letter from, to &nator Inouye, dated 
July 28, 1993 249 

Tower, Charles H., Coordinator, Electronic Publishing Group, letter from, 

to Senator Inouye, dated July 28, 1993 263 

Weiss, William L., Chairman and CEO, Americtech, letter from, to Senator 

Danforth, dated October 20, 1993 264 



S. 1086, THE TELECOMMUNICATIONS 
INFRASTRUCTURE ACT OF 1993 



WEDNESDAY, JULY 14, 1993 

U.S. Senate, 
Subcommittee on Communications of the 
Committee on Commerce, Science, and Transportation, 

Washington, DC. 
The subcommittee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Daniel K Inouye 
(chairman of the subcommittee) presiding. 

Staff members assigned to this hearing: John D. Windhausen, 
Jr., staff counsel, and Kevin M. Joseph, professional staff member; 
and Regina M. Keeney, minority senior staff counsel, and Mary P. 
McManus, minority staff counsel. 

OPENING STATEMENT OF SENATOR INOUYE 

Senator Inouye. This morning's hearing will explore S. 1086, the 
Telecommunications Infrastructure Act of 1993. This bill was spon- 
sored by Senator Danforth and myself. The purpose of this hearing 
is to aid the committee in understanding how this bill will affect 
the telecommunications market, and to discuss improvements to 
the legislation. 

Although there are a number of disagreements about the issues 
involved in this bill, there is one issue on which there is no dis- 
agreement: Everyone agrees that this Nation needs to promote the 
growth and development of an enhanced high quality, universally 
available telecommunications network. 

Rural residents believe that an enhanced network will give them 
access to more advanced health care, and provide greater opportu- 
nities for economic growth. Inner city residents want access to a di- 
versity of information at low cost. Handicapped persons believe 
that telecommunications can compensate for their disabilities. 
Business users want more sophisticated telecommunication serv- 
ices that will enable them to communicate around the world, to 
support their global competitive efforts. 

In short, virtually every consumer group, every participant in the 
telecommunications industry, and every State and local govern- 
ment is demanding that Congress pay greater attention to the po- 
tential economic and social benefits of advanced telecommunication 
services. 

The administration has indicated an enhanced telecommuni- 
cations infrastructure as one of its top priorities. And this bill, the 
Telecommunications Infrastructure Act, is our response to this na- 
tional call for coordinated infrastructure policy. 

(1) 



Of course, disagreement abounds as to how to achieve this goal. 
There are those who would have the Federal Government pay for 
the installation of certain technologies. Under today's fiscal con- 
straints, Government funding on this massive scale is unrealistic. 
Others would choose to deregulate the telecommunications indus- 
try. While deregulation can, in certain cases, promote substantial 
consumer benefits, most observers agree that blanket deregulation 
does not serve the interests of the consumers; or, in the long run, 
the industry. 

This bill chooses a more moderate course that relies on the pri- 
vate sector to make investments in the telecommunications infra- 
structure, based upon consumer demand. The bill we are here to 
consider would recognize that Government can provide a guiding 
hand, by encouraging the private sector to invest in a way that en- 
sures that all consumers may obtain the benefits of these new serv- 
ices. 

The principal means chosen to promote infrastructure develop- 
ment under this bill is to promote competition to local telephone 
services. Clearly, competition has worked for telephone equipment, 
and competition is working for long distance services. Consumers 
now benefit from cheaper prices and more innovative products and 
services, because market forces operate in these two sectors. It is 
now time that consumers of local telephone services should obtain 
the same benefits of competition that are enjoyed by long distance 
customers and buyers of telephone equipment. 

In return for opening the local telephone market to competition, 
this bill permits the telephone companies to enter the market for 
cable television service. While I have had my doubts about the wis- 
dom of allowing the telephone companies to provide cable services 
in the past, there is no question that greater competition for cable 
service would promote consumer welfare. 

There are a number of other provisions in this bill, that deserve 
extensive scrutiny. These issues are not easy to digest, and require 
a g^eat deal of further analysis. Mr. Chairman, your comments, 
please. 

OPENING STATEMENT OF SENATOR ROLLINGS 

The Chairman. Today's hearing is on S. 1086, introduced by Sen- 
ators Danforth and Inouye. The sponsors of this bill intend for it 
to promote competition among the local phone companies in order 
to spur greater investment in the Nation's telecommunications in- 
frastructure. The bill also would allow the telephone companies to 
enter the cable television business. The bill does not let the Bell 
Companies into long distance or manufacturing. This legislation 
clearly raises several important issues about the future of our com- 
munications network, 

I agree that competition is a worthy goal. Competition in a free 
market usually results in growth and development. However, I 
have seen the downside of just relying on competition as well — air- 
line deregulation is one such example. Furthermore, I have seen 
the problems with deregulation for the sake of deregulation. For 
the past 12 years, we have had two different administrations that 
tried to deregulate everything, with no regard for the harm to the 
public interest from markets where effective competition does not 



or will not exist. We need to keep in mind the interests of consum- 
ers throughout the country in an efficient and Eiffordable commu- 
nications network. 

Our telecommunications industry is one of the most successful 
industries in the world. For years, the telephone companies have 
provided Americans with quality, dependable telephone service at 
affordable rates. Telephone service always has been guaranteed on 
a universal basis no matter where an individual lives or what level 
of income that person earns. It is available on a ubiquitous, non- 
discriminatory basis for one reason — ^because we have imposed this 
obligation on the local telephone company, and not because of the 
free market. The Government's agreement with the local phone 
companies is simple — if a company provides telephone service to 
everyone who wants it, the Government will grant it special status 
with a local franchise. The system has served all of our constitu- 
ents well. 

Nevertheless, the world is changing. Technology has provided the 
capability and economic incentives for companies to compete with 
the local telephone companies. The need and opportunities for in- 
creased communications services grow almost daily, it seems. 
These interests have led to the introduction of S. 1086 and this 
hearing today. I look forward to the testimony of the witnesses. 

Thank you, Mr. Chairman. 

Senator Inouye. Thank you, Mr. Chairman. I am pleased that 
we have assembled this morning a diverse array of expert wit- 
nesses, so that we may receive their input on how this bill will af- 
fect the market for telecommunication services. And I appreciate 
the willingness of these witnesses to cooperate with the committee 
in exploring these issues, and I look forward to this testimony. 

I am pleased now to call upon the vice chairman of this commit- 
tee. Senator Packwood. 

OPENING STATEMENT OF SENATOR PACKWOOD 

Senator Packwood. That is the first time I knew that, Mr. 
Chairman. 

Senator Inouye. On my committee you are vice chairman. 

Senator Packwood. You learn something new every time you go 
home. On the trip during the July recess, in talking with a physi- 
cist, he told me about an optical illusion. And that optical illusion 
is that on any kind of an incline, if you are standing at one end 
of it, it seems less steep looking down at it than it does standing 
at the other end looking up at it. 

So that when anyone talks about a level playing field, it depends 
upon which end of the field they are standing on. And if they are 
standing at the bottom, it looks much more tilted against them 
than if you are standing at the top looking at it tilted for you. 
Which probably hinders us in attempting to define what a level 
playing field is. Because all of the parties and participants who are 
interested, are standing in different locations. 

I think we know what we mean, in terms of local telephone serv- 
ice. We, in essence, would say, "Have at it. We will let you all in. 
We will let the cable companies in, we will let the MCI's and the 
AT&T's in. We will let the local Bells in. We will let everybody in, 
to compete on a level playing field." 



And yet, some of the participants would say, "Well, it is not level, 
if some of us have to provide universal service and others do not. 
It is not level, if some of our service is regulated, and we provide 
a disproportionate amount of that service; and others who are cher- 
rypicking," as the argument would be, "are not regulated, and do 
not have to provide service. Therefore, it is not a level playing 
field." 

I think the bill that the chairman and Senator Danforth have in- 
troduced is a good start. My State of Oregon, I think in this session 
of the legislature, will enact a bill directing the public utility com- 
mission to open up local phone service to competition. The bill has 
passed both the house of representatives and the State senate and 
it should be signed by the Governor within the next 2 weeks. 

So, we all start out with the same goal. Whether we set out with 
the same definition of a playing field is another matter. And I look 
forward, Mr. Chairman, to these hearings, to see if we can conceiv- 
ably reach agreement on that definition. 

Senator INOUYE. Thank you very much. Senator Stevens, do you 
have a statement? 

Senator Stevens. Well, I see the cosponsor is here. I would be 
happy to yield. I would yield to Senator Danforth. 

Senator Danforth. I do not have a prepared statement, Mr. 
Chairman. I appreciate the holding of the hearing, and the expedi- 
tious way that you are handling this; your great leadership of what 
I think is one of the really important issues, the big issues that is 
before this Congress. So, I thank you very much. 

OPENING STATEMENT OF SENATOR STEVENS 

Senator Stevens. Mr. Chairman, I ag^ee with Senator Pack- 
wood. This is a good start. And I look forward to these hearings. 
As in the case of the bill that you had, that I rgiised the spectrum 
issue on, I intend to raise several issues on this one. 

One of the major issues, in my opinion, is: How can the FCC do 
all these things we are telling them to do, in the timeframe that 
it must be done in order to keep up with this technological revolu- 
tion that is going on, this tumbling technology that is taking over 
the telecommunications area? 

I think we need some innovative funding concepts involved in 
this bill, that will enable the FCC to have the money, and not be 
subject to the appropriations or the tax policies that have to be 
passed periodically to keep them having the funding to do the iob. 

I also think that we have got to take a look at the, instead of 
leveling the playing field, determining the rate of access to the field 
by various portions of the industry. Because I do not think they can 
all get on tne field at the same time, without tilting it one way or 
the other. And in my opinion, it is the definition of access that is 
going to really have to be worked out, to make this a fair bill. 

But I look forward to working with vou. I hope to be a cosponsor 
of it, by the time it goes to the floor. Tnank you. 

Senator Inouye. Thank you. Senator Lott. 

OPENING STATEMENT OF SENATOR LOTT 

Senator LoTT. Thank you, Mr. Chairman. I was iust looking over 
the witnesses and the panels that we are going to nave today. This 



is certainly going to be most interesting; I am looking forward to 
it. 

And I want to welcome these panelists in advance, and commend 
Senators Danforth and you, Mr. Chairman, for the work that you 
have already done in trying to develop a framework that will stim- 
ulate investment in these information highways of the future. I 
personally think this is the most dynamic part of the future and 
our economy, in the United States. 

So, it is an exciting area that is going to provide just mind-bog- 
gling developments in long distance learning, health care, in- 
creased economic efficiency, all numbers of technology; and in par- 
ticular, I think it is going to be helpful to a State like mine where, 
through the technology we are going to develop here, we can bring 
better teaching and better health care to our rural and poor areas. 

So, it is an exciting field, and I am just delighted that you are 
having this hearing, and the work that has been done. I look for- 
ward to hearing the panel. 

Senator Inouye. Thank you. Senator Gorton. 

OPENING STATEMENT OF SENATOR GORTON 

Senator GrORTON. Mr. Chairman, I, too, think that this is a vi- 
tally important hearing. The direction of creating more competi- 
tion, in one of the most dynamic of all of our technological fields, 
is a worthy one. The complexities are intense, and we are at the 
beginning of that upward climb, as Senator Packwood put it, our- 
selves, of a learning experience to try to do this job right. 

Senator Inouye. Senator Bums. 

OPENING STATEMENT OF SENATOR BURNS 

Senator Burns. Thank you, Mr. Chairman. I have a prepared 
statement I would like to enter in the record, if I might at this 
time. 

Senator Inouye. Without objection. 

[The prepared statement of Senator Burns follows:] 

Prepared Statement of Senator Burns 

Mr. Chairman, let me commend you and Senator Danforth for your leadership in 
introducing this infrastructure bill and holding expeditious hearings. As you both 
well know, I was talking about telecommunications and information infrastructure 
long before it was pwpular to do so. As a result, it is with a great deal of pride and 
satisfaction for me to see the Senate Commerce Conomittee turn its attention to this 
important national policy issue. 

Today in America, we are witnessing the dawn of a new era — a digital, multi- 
media era. As a result of breathtakingly rapid technological developments in the 
computer software and hardware, consumer electronics, and cable television and 
telecommunications industries, a true revolution in the delivery of entertainment, 
information, transactional and telecommunications services is at hand. Through a 
confluence of interests, this digital, multimedia technology revolution will bring to- 
gether a broad cross-section of industries that have heretofore considered them- 
selves unrelated. 

Over the balance of this decade and into the 2l8t Century, this digitization 
phenonenon will revolutionize the communications industry, have profound implica- 
tions for the consumer electronics, entertainment and computer industries, and 
change our way of life forever. 

The U.S. Congress and new Clinton/Gore Administration has a golden opportunity 
to be America's new high-tech pioneers — an opportunity to explore the new Amer- 
ican frontier of high-tech telecommunications and computers that will be unleashed 



through the deployment of hair-thin, gleiss strands of fiber optic cable and the crack- 
ling 01 radio spectrum frequencies. 

By taking bold, forward looking actions to accelerate the deployment of advanced 
telecommunications and information networks — a National Information Infrastruc- 
ture — we could markedly improve our international competitiveness posture and 
dramatically spur domestic economic growth, productivity and job creation. Further- 
more, through advanced educational, health care and other soasd services made pos- 
sible with advanced teleconmiunications and information technology, we can estab- 
lish a quality of life for all Americans which is unparalleled in our nation's previous 
history. Ana through increased use of "teleworit" or "telecommuting" we will reduce 
our reliance on foreign sources of oil, have a positive impact on environmental con- 
cerns and help parents deal with child care and other fainily concerns. 

Yet, as Ajmerica stands at this critical crossroads — the dawn of a new, revolution- 
ary era in high technology, entertainment, information and telecommunications — we 
continue to operate under an antiquated remilatory scheme buUt for a world in 
which order and stability were the watch words rather than this new digital. Infor- 
mation Age which should accommodate and accelerate innovation and change. 
Progress is being stymied and hobbled by a morass of legal and regulatory barriers 
which continue to segment and balkanize the telecommunications and information 
industries into protective enclaves. 

Legislationn designed to aggressively move America forward in developing a fea- 
ture-rich, state- ol-the-art iSational Information Infrastructure would include, 
among other matters: (1) opening the local telephone exchange to greater competi- 
tion in conjunction with greater regulatory freeaom and flexibility for the local tele- 
phone companies to offer advanced services; (2) expanding and redefining universal 
service; (3) promoting regulatory symmetry so that entities providing similar serv- 
ices are regulated or de-regulated in a similar manner; (4) developing interconnec- 
tion and interoperability standards and protocols so that different networks and sys- 
tems interconnect and work as one; (5) protecting privacy and intellectual property 
rights; (6) crafting tough, enforceable safeguards to ensure that local information 
providers have access to and reasonable rate for the information hi^ways; (7) creat- 
ing a competitive bidding system for radio spectrum assignments; (8) permitting 
greater flexible spectrum use so that spectrum is made available without imposing 
crimped, narrow limits on what it will be used for (by doing so, services will evolve 
far beyond original expectations as the cellular success story clearly demonstrates). 
In addition, we coula propose specific legislation dealing directly with distance 
learning, telemedicine and telecommuting. 

I look forward with great anticipation to today's testimony. Again, thank you, Mr. 
Chairman. 

Senator Burns. I want to congratulate you and Mr. Danforth for 
coming forward with this situation. I am certainly glad that, as 
Senator Gorton would say, that we are beginning. It seems like we 
began about 4 years ago, when we started talking about competi- 
tion in the field, and offering ideas that would expand, or to lay the 
groundwork or the fi-amework of a national infrastructure for tele- 
communications. 

This is not a new subject for us, as you know that Senator Gor- 
ton and I had 1,200 last year that went along the same lines, but 
had some firewalls. And I want to congratulate Senator Danforth 
and Senator Inouye, how they have taken this issue and have stud- 
ied it over time, and now have come to realize that, yes, this is 
something that has to be done for the good of this country. 

I have long advocated this, because we have already started in 
my State of Montana, in the areas of distance learning, in 
telemedicine, in the areas that were never gone into before or used 
before; because of a vision that we had for our own State of Mon- 
tana, that this industry covers great distances. And it is important 
to rule America in the areas of learning and education, and in 
rural health. 

But it is also a necessity for our inner cities, where we have de- 
clining tax bases, where we have to share teaching resources and 
medical resources for the people, and we have to stimulate minds 



to break those bonds that hold us sometimes in areas where we 
just do not want to be held. 

So, I congratulate you, and I hope to be a cosponsor of this legis- 
lation, too, before it is all over. There are some things that we can 
fix, and we are going to talk about. But I con^atuTate our chair- 
man and our ranking member, for bringing this issue to the fore- 
front. No other, I do not think there is any other issue before this 
Nation, has as much vision for it, for infrastructure, than this one 
does. So, I congratulate you, and thank you very much. 

Senator Inouye. Thank you very much. I think it would be ap- 
propriate to acknowledge at this point that Senator Bums has been 
the prod, that has brought us to this point here. And we appreciate 
that very much. 

At this time, I would like to have a 6-minute video show, pre- 
pared by the Computer Systems Policy Project. It will give us, in 
a capsule form, what we are considering today. 

[A video was shown.] 

A Voice From the Audience. Hello, I am John Sculley, chair- 
man of Apple Computer, and also chairman of the Computer Sys- 
tems Policy Project. The video that you are about to see dem- 
onstrates how a national information infrastructure will benefit all 
Americans: Education, health care, scientific research, communica- 
tions, and business and industry. 

Mr. Sculley. During the growth of the Industrial Age, national 
links were built to move people, goods, and raw materials. Now, 
America is entering the Information Age, and a new infi'astructure 
is needed. Just as interstate highways were crucial to our postwar 
development, national data links are necessary for our growth in 
the 21st century. 

The answer is a new infrastructure connecting the U.S. informa- 
tion and computing resources, a national information infrastruc- 
ture. 

Just pull it out, and fast forward to those things. 

I think we can handle that. 

This is a computer visualization, showing the airflow structure of 
a thunderstorm, an example of the new visual forms of data han- 
dled by today's computers, an example of the power of today's 
supercomputers; and the supercomputer of today will be the per- 
sonal computer of tomorrow. 

In a recent demonstration, a high-speed data link connected an 
Illinois supercomputer to desktop computers on a stage in Boston. 
Two scientists, separated by one-half a continent, shared the 
supercomputer, to analyze the structure of a galaxy. 

Computer experts have developed future scenarios, showing how 
the national information infrastructure could deliver high perform- 
ance computing power to industry; for U.S. scientists and engi- 
neers; to students, no matter how far they might be from learning 
centers; to researchers, already finding problems growing too com- 
plex for their own local resources. 

If I try to address of how much computer power, flexibility is re- 
quired to study and understand the human body, it is very easy to 
say, there is no upper limit. And that has drawn our group and 
other groups into the use of supercomputers. We cannot afford to 
have them in our own backyard. We need the best. 



8 

The national information infrastructure could bring the advan- 
tage and power of high performance computing, now accessible to 
only a few, into any office or laboratory in America, 

This is the medical library at the national Institutes of Health, 
one of our hundreds of extensive information resources. The infor- 
mation infrastructure would make libraries like this accessible, in- 
stantly. Nationwide. 

Future scenarios show how data could be delivered in quickly un- 
derstandable forms, like audio and video. Emergency medical per- 
sonnel could have instant access to life-saving medical data. Doc- 
tors could collaborate across the networks from any location, urban 
or rural; access data on complex cases; share CAT scans and other 
diagnostic information. 

Business also could find national trend data, or stay abreast of 
Government regulations. Picture files and video would be instantly 
available for communication and education. The information infi'a- 
structure would help us realize the full value of our stored informa- 
tion resources, and open them to use, nationwide. 

Excuse me. Bill Gilbert is calling back. 

Television and computer technologies are merging, to support col- 
laboration across any distance. There is an enormous amount of in- 
formation in screens like these, and it takes a high-speed network 
to transmit it. But once the infrastructure is in place, the Nation 
has a new, more effective way of working. Of course, it would have 
instant impact in the communication business; it would also great- 
ly improve business communication, and academic research. 

The information infrastructure would make the country informa- 
tion efficient; giving people in all walks of life access to the advice 
and data they need; in forms they could immediately understand 
and use. That is the power in the national information infrastruc- 
ture. It delivers information in the many forms computers now use 
every day. 

There is no place in the world that could have more than we 
could have; and have a little rural town called Hickman, with less 
than 2,000 people, with a high school of less than 260. And we can 
have the same things that anybody could have anywhere, plus get 
to live out in the country and breathe clean air. 

Test projects with networks already show real promise in edu- 
cation. Linked computers bring rural students information re- 
sources they could not get any other way. Video links bring gifted 
teaching into several widespread classrooms simultaneously. Na- 
tional Geographic's Kids Network creates computer collaboration 
for elementary school science students. All of these programs are 
working to bring rich information resources closer to students. 

We need to prepare teachers to use the many resources that the 
information infrastructure will bring to the classrooms of the near 
future. A student in Minneapolis could use the Shakespeare Ar- 
chives of the Folger Library in Washington, DC. All the resources 
in the U.S. Geological Survey could bring 3-dimensional computer- 
ized maps and simulations into an open classroom. 

With the new uses of wireless communication, students of any 
age or need would have access to new kinds of help. Elderly Ameri- 
cans, just starting to reach out today, would have access to a whole 
world of communication, all from their homes; better monitoring for 



health and security; easy, intimate communication with family and 
friends. 

The national information infrastructure would provide America's 
students and elderly with information in forms they need today. 
This is a country very rich in information resources. The informa- 
tion infrastructure will make these resources more accessible; easi- 
er to use; and more productive. They will create an environment 
for nationwide collaboration. 

Industry, academia, and Government are already cooperating. It 
is a beginning. Now, we need to build a real momentum to make 
this vision a reality. The national information infrastructure is crit- 
ical for America's future. 

For all Americans to realize these benefits, a national informa- 
tion infrastructure must be built. The computer assistance policy 
project calls upon the new administration and the new Congress to 
work with us and with other industries to make the information in- 
frastructure a national priority and building it a national tech- 
nology challenge, to dedicate the Government resources needed to 
coordinate this effort and to work with industry on key public is- 
sues, to pursue an ambitious research agenda including demonstra- 
tion projects to provide the foundation for the information infra- 
structure. 

By working in partnership, industry and Government can build 
this infrastructure, the key component toward dramatically improv- 
ing how Americans live and work, how we educate ourselves and 
our children, and how we build industry and how we do business. 
We need this infrastructure to bring us into the 21st century. It is 
1993, and we have to start building it today. 

Thank you for watching, and I hope you join us in looking for- 
ward to the future. 

[End of videotape.] 

Senator Inouye. Now, we will proceed with the live show. Our 
first witness is the president of the Council on Competitiveness, 
the project director of the 21st Century Information Infrastructure 
Project, Mr. Daniel Burton. Before we proceed, May I call on Sen- 
ator Exon for a statement? 

OPENING STATEMENT OF SENATOR EXON 

Senator ExoN. Mr. Chairman, thank you very much. I certainly 
want to congratulate you, and I am looking forward to the testi- 
mony by the witnesses today on this extremely important matter 
that we are wrestling with here. If it were not for your leadership, 
Mr. Chairman, we would not be at the point here of beginning 
some important discussions, I think, which are going to nave a 
great deal to do with what happen in the future and the whole tele- 
communications industry. 

Certainly, you and Senator Danforth have sparked debate, mean- 
ingful debate, much needed debate, on the future structure of 
America's telecommunications industry. No other sector of our 
economy holds more hope for jobs creation, productivity improve- 
ment, education enhancing the American way of life than what the 
subcommittee is tackling here today. 

In the next century, quick, comprehensive, and affordable access 
to information and creation of infrastructure to facilitate that ac- 



10 

cess will revolutionized American life much in the same way the 
assembly line revolutionized American life in the days of Henry 
Ford. 

The challenge is to maximize the benefits and opportunity for the 
American consumer, the economy, and the worker with the mini- 
mum expense to the American taxpayer. Certainly, I congratulate 
the authors of S. 1086, and again, I emphasize that the debate that 
we are starting here today is extremely important. However, at 
this juncture I nave not yet been in position to endorse their legis- 
lation. It seems to me that some changes are needed to be made. 
But once again, I emphasize the debate is extremely important in 
the view of this Senator. 

It is interesting to me that all sides in the information debate 
say that they are the ones who represent fair competition. But 
none can agree on what fair competition really is. The bottom line, 
Mr. Chairman, it seems to me is what is best for the American 
consumer who is going to pay the bills, whatever type of an infra- 
structure we have in telecommunications in the future. 

As I listen to today's testimony, I will continue to search for a 
formulation of policy which represents a grand compromise, if you 
will, that is obviously necessary in the new information age, one 
that will promote fair competition but assure that rural and small 
communities have access to advanced technology. 

Senator Grassley and I have introduced legislation specifically 
aimed at helping rural and smaller phone systems share in tech- 
nology advancements, and have appreciated the support of many 
members of this committee in that effort. 

I look forward, Mr. Chairman, to working with you and my other 
colleagues to find that compromise and to move America ahead to 
a brighter telecommunications future. 

Thank you, very much. 

Senator INOUYE. Thank you very much. Senator Exon. Senator 
Rockefeller. 

OPENING STATEMENT OF SENATOR ROCKEFELLER 

Senator Rockefeller. Mr. Chairman, I will put my statement in 
the record. 

It is, as I gather previous ones have been, of a general nature, 
and so obviously I am interested in what happens in rural areas 
and I want to see us move forward strongly on information high- 
ways and everything else. And so it is a carefully balanced state- 
ment, one that would not shed much light, which is what I pre- 
sume this hearing is all about. 

Senator Inouye. Your statement will be made a part of the 
record. 

[The prepared statement of Senator Rockefeller follows:] 

Prepared Statementt of Senator Rockefeller 

I wish to commend Chairman Inouye and Senator Danforth for authoring and in- 
troducing the Telecommunications Infrastructure Act. 

This legislation has important goals. It is intended to promote competition in local 
telephone services and to increase investment. Its authors hope that the new invest- 
ment will contribute toward development of the new telecommunications tech- 
nologies associated in popular discussion with the idea of the "information super- 
highway." 



11 

If we can find a way to stimulate such development, it could be an important ele- 
ment in reviving the American economy. It could start a new wave of innovation 
and growth, in a manner comparable to what railroad building did for our economy 
in the 19th century. Of particular interest to me are such possibilities as more wide- 
spread access to health care and educational services and expanded business oppor- 
tunities. 

The legislation raises complex issues regarding competition and regulation. State 
and Federal oversight, consumer interests and business interests, the differences be- 
tween urban and rural markets, and the options for ensuring that new technology 
is encouraged and made widely available. 

Over the last decade we have grown more sophisticated about markets and de- 
regulation. We know that where it is possible, competition remains key for economic 
growth £ind consumer welfare, but that deregulation must be undertaken carefully, 
especially in rural areas. 

I look forward to the discussion of this bill. I look forward to woricing with all 
concerned to see if we can answer the questions and solve the problems raised by 
this legislation. Our goal is to open up for the American economy and the American 
people the benefits oia new age of innovation in telecommunications, while preserv- 
ing the achievements already attained. 

Senator INOUYE. Senator Breaux. 

OPENING STATEMENT OF SENATOR BREAUX 

Senator Breaux. Well, thank you, Mr. Chairman. I will just be 
very brief. I see we saw a film on what technology can do. That is 
great and wonderful. The question is really who gets to do it. I 
mean, that is what we are really talking about. I mean, which seg- 
ment of the industry gets to do what, and at what time and under 
what circumstances and what rules. 

I am almost at the point of becoming convinced that we are never 
going to figure this thing out. I mean, we are tinkering around try- 
ing to provide a little competition here, but not too much. And a 
little competition over here but not too much. I mean, I am even 
to the point of becoming frustrated with it and saying let everybody 
compete. If you want to manufacture, go out and manufacture. If 
you can do it, do it. 

If you can compete on the local telephone service, by golly, get 
in there and do it. If you think you can provide long distance serv- 
ice and have the equipment and the technology and the know-how, 
go to it and let us make it work. I think that we are all wrestling 
with a great deal of frustration on how to provide competition but 
restrict it, which is sort of contradictory in terms. And I think that 
is why we have such a difficult problem here, and I want to com- 
mend Senator Danforth and our chairman for really trying to make 
a real effort at this and seeing how frustrating it is. 

But you all have certainly made a monumental effort of trying 
to provide the type of competition I have just suggested. Perhaps 
it is time to just say let everybody compete. I mean, that is what 
America is about. 

Thank you. 

Senator Inouye. Thank you very much. Mr. Burton. 

STATEMENT OF DANIEL BURTON, PRESIDENT, COUNCIL ON 
COMPETITIVENESS; AND PROJECT DIRECTOR, 21ST CEN- 
TURY INFORMATION INFRASTRUCTURE PROJECT 

Mr. Burton. Thank you, Mr. Chairman. I am very pleased to be 
with the subcommittee today and pleased to discuss the views of 
the Council on Competitiveness on America's information infra- 



12 

structure. The council is a private, nonprofit, nonpartisan coalition 
of chief executives from U.S. business, U.S. labor, and U.S. aca- 
demia. It has one overriding objective: to improve the ability of 
American companies and workers to succeed in world markets in 
such a way that we build rising standards of living here at home. 
We think that information infrastructure is critical to that task. 

In January 1993, the council launched a project on 21st century 
information infrastructure that was unique, unique in that it 
brought together all of the major players who are building and ac- 
tually using much of this infrastructure. Participating in this 
project are cable companies, regional Bell operating companies, 
long distance carriers, cellular phones, computer hardware, soft- 
ware, and service companies, broadcasters, publishers, labor 
unions, and universities. 

These groups have very different and sometimes competing agen- 
das, but I think it is very noteworthy that they are all willing and 
committed to come together to try and develop the private sector 
consensus that is so important to informed and motivated public 
policy. And I would posit that a year or even 6 months ago it was 
very difficult to get this kind of momentum and this kind of com- 
mitment in the private sector to coming up with a consensus posi- 
tion which will make your jobs here in Congress that much easier. 

My comments this morning very much reflect the consensus 
views of the council's advisory committee, ref.ected in the report we 
released in May entitled "Vision for a 21st Century: Information 
Infrastructure." We do not have all the answers, and there are 
many aspects of your bill that I would like to reserve comments on 
until we have really had a chance to develop a deeper consensus. 
But I think we have developed a framework and a perspective at 
the Council on Competitiveness that represents an important in- 
dustry consensus. 

We had hoped to have either John Young, former CEO of Hew- 
lett Packard or Charles Vest, the President of MIT, who are 
cochairing our effort with us here today. Time and distance made 
that impossible. We then investigated the possibility of using infor- 
mation infrastructure to link them up with this committee so that 
you could talk to them and interact with them, even over distance. 

Unfortunately, while the technology exists to do this, the infra- 
structure is not readily available. We did not have enough leadtime 
to pull together the consulting services necessary, to do the nec- 
essary paperwork or to get the equipment and the video, to say 
nothing of the cost. And so instead of having my two chairmen 
here, I have a laptop computer and I have a television. 

Now, had we had the infrastructure, one of these mechanisms, 
or perhaps another one that we have not yet manufactured, would 
be able to plug into a socket, readily link up to Mr. Young and Mr, 
Vest in California and Massachusetts, and provide an opportunity 
for this committee to interact very directly with them and answer 
some of the key problems that you are dealing with. I think this 
is an example of the fact that the technology exists, the demand 
is there. In fact, given enough time we can string it all together, 
but it does not exist in a timely, cost-effective flexible, accessible 
way that I think the American public and in fact this committee 
is looking for. Hopefully, in the future we will have a system so 



13 

that in a hearing hke this we can simply bring a device, plug it 
into the wall, and this committee will be able to easily interact 
with John Young or Charles Vest or whoever you think is appro- 
priate. 

I would like to focus on a couple of key questions that I think 
are behind the debate on information infrastructure today. First of 
all, where do we stand? The fusion of telecommunications and com- 
puting technology is setting the stage for an advanced information 
infrastructure that will literally transform the economy. Many of 
the expensive elements of this infrastructure are already in place, 
such as long distance fiber networks and computers. So are mil- 
lions of potential users. 

What is in short supply is the ability of different parties to work 
together to define and deploy key elements and interfaces. While 
many of our competitors have chosen to rely on centralized Govern- 
ment planning to accelerate the deployment of information infra- 
structure, the United States has relied on demand-driven competi- 
tive policies and market forces, tempered by some regulatory re- 
straints. It is essential that we preserve this strength. 

In doing so, however, and I think the committee recognizes this, 
we must not ignore the need for public policy reform. I would posit 
that the big question facing the American political system today, 
however, is not Government planning versus decentralized mar- 
kets, as some would characterize it in an international context. The 
United States has reaped enormous benefits from its market-ori- 
ented competitive strategy, and will undoubtedly continue to do so. 
Instead, the policy challenge before us is to find the appropriate 
balance of regulation, competition, and cooperation. 

The second question I would like to address is what is our vision? 
The information infrastructure of the 21st century, in fact, can be 
pretty easily defined. There is a consensus view that is widely 
shared: "The information infrastructure of the 21st century will en- 
able all Americans to access information and communicate with 
each other easily, reliably, securely, and cost effectively, in any me- 
dium, voice, data, image, or video, anytime, anywhere. This capa- 
bility will enhance the productivity of work and lead to dramatic 
improvements in social services, education, and entertainment." 

The information infrastructure can be divided into four basic 
parts. First, a set of widely accessible and interoperable commu- 
nications networks; second, digital libraries information data bases 
and services; third, information appliances and computing systems; 
and, fourth, trained people who can build, maintain, and operate 
these resources. Each of these components is dependent on the oth- 
ers, and it is important to think of the infrastructure in terms of 
a system. 

The communications system is usually the piece of the infra- 
structure that receives the most attention. Interestingly enough, 
here, too, there is very broad consensus about what it is. The com- 
munications system of the future, like the network of today, will 
be made of wire, fiber, and radiowaves, or encompass all oi these 
media. It will be a diverse collection of variable bandwidth digital 
interoperable interactive commercially provided organic networks 
that are easy to use and universally accessible. 



14 

The networks will be diverse because different networks have dif- 
ferent needs and characteristics. They will be variable bandwidths 
because they must carry not only voice but also image, video, and 
high speed data. They will be digital because of the ease and accu- 
racy with which digital information can be stored, transferred, 
moved, and managed. They will be interoperable because different 
networks need to communicate easily. They will be interactive be- 
cause of the need for point-to-point communication. They will be 
commercially provided because a competitive marketplace ensures 
the widest range of services and products to the greatest number 
of users at affordable prices and because private capital is needed 
for the investment. They will be organic because they will develop 
at different times and places, depending upon market needs. They 
will be easy to use so that they can serve the needs of the broad 
public. Ana they will be universally accessible because every Amer- 
ican should be able to utilize them. 

The next question I would like to address is what is the role of 
Government? We believe that Grovernment's task is to help articu- 
late the national need for an advanced information infrastructure, 
to serve as a catalyst and coordinator, to bring U.S. telecommuni- 
cations regulations in line with new requirements and market op- 
portunities, and to make sure that its diverse R&D programs are 
well managed and designed to advance practical applications. The 
best way to enable the creation of an advanced information infra- 
structure is to let competitive forces work constructively in the 
marketplace. 

Before I conclude, I would like to address one more question, 
which is where do we go from here? We believe that more than any 
technology program, the regulatory framework in the United States 
will determine the face of America's information infrastructure. In 
many respects, the U.S. regulatory framework, particularly in tele- 
communications, is a holdover from the 1930's. America's legal and 
regulatory bodies are fragmented and have not kept up with ad- 
vances in technology. 

The best role for Government is the one that is least intrusive. 
Rather than try to pick winners among technologies or choose one 
technology platform, the Government should let market forces de- 
termine winners and losers. Government regulations should aim to 
create a playing field that allows for all interested parties to exploit 
market opportunities as competitiveness issues warrant. 

The policy context, therefore, should be industry-neutral and 
technology-neutral so that it promotes those applications that are 
efficient and affordable for individual consumers and companies of 
all sizes. Moreover, it should be structured so that it encourages 
systematic private sector investment. The immediate objective 
should be to make users comfortable with the technology and appli- 
cations that the current network can readily deliver. 

In conclusion, from a competitiveness perspective, I would like to 
emphasize that we believe the stakes are very high. Advances in 
technology and the rise of international competition have made 
knowledge the new currency of the global economy. Superior 
knowledge is what gives nations an edge in world markets and al- 
lows them to create jobs and maintain high standards of living for 
their citizens, issues related to economic growth. Jobs and competi- 



15 

tiveness are therefore independently linked to questions about the 
information infrastructure that makes it possible to generate and 
share information. 

To a very large extent, information infrastructure will determine 
the comparative advantage of nations in the Information Age. In 
order to capitalize on a growing reliance on information technology, 
we need to strive for a system that will make us more innovative 
and more productive than other nations. Ultimately, it is the abil- 
ity to harness technolop' in the form of practical applications that 
will determine international leadership in this field. 

Because it is impossible to predict the exact path that technology 
will follow or the products and services that consumers will de- 
mand, flexibility in market forces must be the hallmark of the U.S. 
approach. 

That is the conclusion of my prepared statement. I would also 
like to ask that our vision statement which elaborates on some of 
these themes be included in the record. 

[The prepared statement of Mr. Burton follows:] 

Prepared Statement of Daniel F. Burton, Jr. 

I am pleased to be able to discuss with you the views of the Council on Competi- 
tiveness on America's information infrastructure. The Council is a private, non-prof- 
it, non-partisan coalition of chief executives from U.S. business, labor and academia. 
It has one overriding objective — to improve the ability of American companies and 
workers to compete in world markets while building a rising standard of living at 
home. 

In January 1993, the Council launched a project on 2l8t Century Information In- 
frastructure that brings together the diverse parties who are actually providing and 
using the infrastructure. Participating in the project are cable companies, the re- 
gional Bell operating companies,long-distance carriers, cellular firms, computer 
hardware, software and service companies, banks, broadcasters, publishers, labor 
unions and universities. These groups have difierent — often competing — interests, 
but they are committed to working with the Council to develop the broad-based pri- 
vate sector consensus that is so crucial to informed public policy. 

My comments this morning wUl reflect the consensus views of the Council's advi- 
sory committee on information infrastructure. We do not have all the answers, and 
there are many aspects of your bill that I would like to reserve comments on until 
the Council has had time to develop a deeper consensus on some of the critical is- 
sues. But we have developed a perspective and a framework that represents an im- 
portant industry consensus. 

I had hoped that John Young or Charles Vest, Co-chairs of our Advisory Commit- 
tee could also be with us here today. However, time and distance made that impos- 
sible. We investigated the possibilities of linking them to this hearing via video con- 
ferencing facilities. Unfortunately, while the technology exists to accomplish this, 
the infrastructure is not readily available. We did not have enough lead time to es- 
tablish the appropriate coimections and rent the equipment for a video conference — 
to say nothing oi the cost. This is just one simple example of how a national infor- 
mation infrastructure could have allowed us to overcome the barriers of time and 
distance. 

While many of the pieces of the infrastructure exist today, they are not 
interoperable or readily available, nor are they flexible and easy to use. In the fu- 
ture, the commonplace items here on the table with me — the TV and a laptop com- 
puter — or some new device yet to be manufactured, will provide multimedia capa- 
bilities so that I will be able to bring a device into this hearing room, plug it in, 
turn the switch, and you will be able to see and talk with John and Chuck. 

1. Where Do We Stand? 

The fusion of communications and computing is setting the stage for an advanced 
information infrastructure that will literally reshape the economy. Many of the ex- 
pensive elements, such as long-distance fiber networks and computers, are already 
in place. So are millions of potential users. What is in short supply is the ability 
of different parties to work together to define and deploy key elements and inter- 
faces. 



16 

While many of our competitors have chosen to rely on centralized government 
planning to accelerate the deployment of such an infrastructure, the United States 
has relied on demand-driven, competitive policies and market forces, tempered by 
some regulatory restrsdnts. It is essential to preserve this strength. 

In doing so, however, we must not ignore the need for public policy reform. The 
policy issue facing the United States is not centralized government planning versus 
decentralized markets. The nation has reaped enormous benefits from its market- 
oriented, competitive strategy and will undoubtedly continue to do so. Instead, the 
policy challenge is to find the appropriate balance of regulation, competition and co- 
operation. 

2. What is Our Vision? 

The vision for the future of America's information infrastructure can be easily de- 
scribed and is widely shared. 

The information infrastructure of the 21st century will enable aU Americans to 
access information and communicate with each other easily, reliably, securely and 
cost-effectively in any medium — voice, data, image or video — anytime, anywhere. 
This capability will enhance the productivity of work and lead to dramatic improve- 
ments in social services, education and entertainment. 

Information infrastructure can be divided into four parts: 1) a set of widely acces- 
sible and interoperable communications networks, 2) digital libraries, information 
databases and services, 3) information appliances and computing systems that are 
easy to use, and 4) trained people who can build, maintain and operate these re- 
sources. Each of these is dependent on the others. 

The communications system usually receives most of the attention. Here, too, 
there is broad consensus. The communications system of the future, like the net- 
work of today, will be made of wire, fiber or radio waves, or encompass all of these 
media. It will be a diverse collection of variable bandwidth, digital, interoperable, 
interactive, commercially provided, organic networks that are easy to use and uni- 
versally accessible: 

• Diverse because different networks serve different needs and have different 
characteristics; 

• Variable bandwidth because they must carry not only voice, but also image, 
video and high-speed data; 

• Digital because of the ease and accuracy with which digital information can be 
stored, transferred, moved and managed; 

• Interoperable because different networks must be able to communicate easily; 

• Interactive because of the need for point-to-point communication; 

• Commercially provided because a competitive marketplace ensures the widest 
range of services and products to the greatest number of users at affordable prices 
and because private capital is needed for the investment; 

• Organic because tney will develop at different times and places depending on 
market needs; 

• Easy to use so that they can serve the needs of the broad public; and 

• Universally accessible because every American should be able to utilize them. 

3. What Is the Role of Government? 

Government's task is to help articulate the national need for an advanced infor- 
mation infrastructure, serve as a catalyst and coordinator, bring U.S. telecommuni- 
cations regulations in line with new requirements and market opportunities, and 
make sure that its diverse R&D programs are well managed ana designed to ad- 
vance practical applications. The best way to enable the creation of an aavanced in- 
formation infrastructure is to let competitive forces work constructively in the mar- 
ketplace. 

4. Where Do We Go From Here? 

More than any technology program, the regulatory framework will determine the 
face of America s information inirastnacture. In many respects, the U.S. regulatory 
framework, particularly in telecommunications, is a hold-over from the 1930s. Amer- 
ica's legal and regulatory bodies are fragmented and have not kept up with ad- 
vances in technology. The best role for government is the one that is least intrusive. 
Rather than try to pick winners among technologies or choose one technology plat- 
form, the government should let market forces determine winners and losers. Gov- 
ernment regulations should aim to create a playing field that allows for aU inter- 
ested parties to exploit market opportunities, as competitive issues warrant. 

The policy context should be industry-neutral and technology-neutral so that it 
impartially promotes those applications that are efficient and affordable for individ- 
ual consumers and companies of all sizes. Moreover, it should also be structured so 
that it encourages systematic private sector investment. The immediate objective 



17 

should be to make users comfortable with the technology and applications that the 
current network can readily deliver. 

CONCLUSION 

The stakes are high. Advances in technology and the rise of international competi- 
tion have made knowledge the new currency of the global economy. Superior knowl- 
edge gives nations an edge in world markets and allows them to create jobs and 
maintain high standards of living for their citizens. Issues related to economic 
growth, jobs and competitiveness are therefore intimately linked to questions about 
u\e information infrastructure that makes it possible to generate and share informa- 
tion. 

To a large extent, information infrastructure will determine the comparative ad- 
vantage of nations in the information age. In order to capitalize on our growing reli- 
ance on information technology, we need to strive for a system that will make us 
more innovative and productive than other nations. Ultimately, it is the ability to 
harness technology in the form of practical applications that will determine inter- 
national leadership in this field, because it is impossible to predict the exact path 
that technology will follow, or the products and services that consumers will de- 
mand, flexibility and market forces must be the hallmaik of the U.S. approach. 



["Vision for a 21st Century Information Infrastructure," by the Council on Com- 
petitiveness may be found in the committee's files.] 

Senator Inouye. Thank you very much, Mr. Burton. Obviously, 
as Senator Breaux and Senator Stevens have noted, there is an air 
of frustration here because, first, we are not experts, none of us 
are. We do not know anything about the high technology involved. 
We are users and consumers for the most part, and we are con- 
cerned about cost. 

Throughout your statement you used the phrase "cost-effective." 
Who do you suggest should bear the cost? 

Mr. Burton. Well, I think throughout my statement I also used 
the words "market forces" and "competition," and it is our view 
that market forces and competition will provide the lowest cost 
structure and the widest level of applicability. And, therefore, that 
is the principle that we endorse. 

Senator Inouye. Would that mean that those with the most 
readily available resources would be the dominant forces? 

Mr. Burton. We have not said that specifically. I think in addi- 
tion to focusing on a market solution, we have also recognized that 
the user must come first. And that is not simply large business 
users, that is the broad American public. And questions of ease of 
access and affordability are absolutely essential and have to be ad- 
dressed as part of the broader package. 

Senator Rockefeller, But you have not answered the chair- 
man's question in any way, shape, or form. I think he wants an an- 
swer from you. 

Mr. Burton. Can you repeat the question, then, Mr. Chairman? 
I think I should also state that what I am representing here and 
really the extent that I feel that I can comment 

Senator Rockefeller, The question that he asked was, those 
that have the resources, will they then be able to dominate? That 
was his question. You did not answer it. 

Mr. Burton. Right. I do not know that I can answer that. I think 
the views that I am representing are the consensus views. We have 
had this project underway for 6 months, I think we will be able to 
address issues like that more specifically if you give us 6 more 
months. 



18 

There are large users today who are already establishing their 
own infrastructures, their own network, their own systems. That is 
going forward if you look at a lot of large businesses, for example, 
and private concerns. 

The issue is. How do you continue that momentum and broaden 
it so that the large American public also has ready access to the 
system? 

Senator Inouye. We have many other questions, but obviously as 
you can see this is the best turnout we have ever had on this sub- 
committee, and so time is of the essence. 

I would like to call upon the author of the measure. Senator Dan- 
forth. 

Senator Danforth. Thank you, Mr. Chairman. Mr. Burton, you 
described Government's role and as it should be. You also said that 
the current regulatory framework we are now existing under is a 
relic of the 1930's. I assume from that that what we are doing now 
is not right. I mean government and governmental policy is now 
serving as an impediment to the advancement of telecommuni- 
cations. Is that not correct? 

Mr. Burton. Yes, we believe that some regulatory reforms are 
necessary. 

Senator Danforth. And would they not have to be fairly dra- 
matic regulatory reforms, in your opinion? 

Mr. Burton. There are a few ftindamental issues which would 
have to be addressed. How do you shape the competitive environ- 
ment and how do you guarantee universal access or broad access 
are two key questions. 

The concern that we have heard expressed in the broad commit- 
tee is that this infrastructure will evolve; it is evolving; we will 
have one. The key is how quickly it is evolving and how we can 
accelerate the deployment of an advanced information infrastruc- 
ture. 

Senator Danforth. Well, under the present situation Govern- 
ment is an impediment, is it not, in that it is basically saying to 
various industries you cannot compete in one area or another? I 
mean, obviously if we move to competition there are various transi- 
tional problems that have to be worked out. You have to be able 
to assure, for example, imiversal access. 

But is it not fair to say that under the present system really we 
are not favoring competition, and therefore we are doing the oppo- 
site of what you testified we should be doing? 

Mr. Burton. Yes. We are not favoring competition as much as 
we need to. 

Senator Danforth. You obviously have not testified pro or con 
with respect to the specific legislation that is before us. Are you fa- 
miliar with the legislation? 

Mr. Burton. I am familiar with the broad contours of the legisla- 
tion. As I mentioned in my opening comments what we are trying 
to do is really something that has not been done heretofore, which 
is bring together all of the major players in the private sector and 
broker a consensus on some key issues. 

What we have done to date is put together a vision statement. 
We are currently looking at some of the critical issues. You and the 
chairman should be congratulated for putting forth a piece of legis- 



19 

lation which really tries to get at some of the tough issues. Those 
are the same issues the council will be addressing in the future. 

Senator Danforth. Let me just ask you one other question. This 
is obviously a very big subject area that we are working with in 
this legislation. The decisions that will be made, if we make deci- 
sions, are going to be ones that will be very controversial. 

One approach to controversy and difficulty is to say, "Well, let us 
let inertia govern and just really do nothing, just maintain the situ- 
ation as it is now." My own view is that we should get on with it; 
that while this is a big subject the issues are fairly well known, 
this is not a new matter. This is an area that has been debated 
and dealt with and addressed by courts and so on for a very long 
period of time. 

Will you counsel the kind of caution that would end up leading 
nowhere, or do you think that we are pretty well in a position now 
where we can get on with the business of addressing the policy 
questions? And if there are problems in what we are doing now, ac- 
tually changing those? 

Mr. Burton. It is very important to address the policy questions, 
and if there are problems to change them. I would posit that what 
has changed much of the landscape is technology. Today suddenly 
there are possibilities with the infrastructure that were not pos- 
sible and not economically feasible on a broad basis before. 

What we have is a technology that is forcing industries and mar- 
kets to gallop ahead, and it is very important that the regulatory 
environment try and frame a situation which will allow for a very 
productive and efficacious deployment of that technology. 

Senator Danforth. Thank you, Mr. Chairman. 

Senator INOUYE. Thank you. Senator Packwood. 

Senator Packwood. When the chairman asked about those in- 
dustries with resources he may have been driving at the argument 
raised by some, including I think AT&T, that if you had a level 
playing field immediately you would tilt automatically in favor of 
the Bells because they have an existing infrastructure. Is that true 
or not? 

Mr. Burton. It depends on who you talk to. I am not the person 
to give you the definitive answer. If you talk to the Bells, I think 
they are looking from the top of that. If you talk to some other com- 
panies, they are looking at it from the bottom of the incline, and 
so you get very different perspectives. 

Senator Rockefeller. But I think he asked you for your view. 
I mean, we are well aware there are different views. 

Mr. Burton. Again, the council's view is a consensus view, and 
that is the view that I am representing. And I apologize if I am 
not able to give you the precise and specific questions that you are 
posing. But I think our comparative advantage is very much the 
private sector consensus. 

The key question with opening markets and open competition is 
really a question of pace and who gets into the action when. It is 
an all or nothing. It is how you phase it and how you establish it 
so that all parties have a fair play. 

Senator Packwood. I take that by staging you literally mean 
that. If we do not level the piajdng field immediately we may have 



20 

to do it over a period of years to allow everybody time to get ready 
for the access. 

Mr. Burton. Yes. As far as the council is concerned if we do this 
tomorrow — ^first of all, I am not sure that there is a consensus for 
a solution to do that. And there are several thorny questions, uni- 
versal access being one of them, that are important to build into 
the calculation. Therefore it is going to be a process of evolution. 

Senator Packwood. Next question. Assuming you level the play- 
ing field, and I sense you are not very enthusiastic about Govern- 
ment regulation, do you think lack of regulation and a free market- 
place, given a level playing field, will more likely serve more needs 
than government regulation? Do I correctly state roughly the coun- 
cil's position? 

Mr. Burton. Yes. The principle of the council is that open com- 
petition is going to accelerate this. I think that the regulatory 
issue, however — again, it is not black or white. 

Senator Packwood. I understand. Do you worry that given that 
lack of regulatory structure, that all of the contestants into the fray 
may first try to pick off the most valuable sectors of the market, 
and that universal service, especially if it is less remunerative, may 
suffer? 

Mr. Burton. That is a concern, and that is why this committee 
and others have focused on universal service and broad access. The 
private sector recognizes the importance of that issue as well. 

Senator Packwood. I do not know if the council has a position 
and maybe you do as you have a bias against regulation. Did we 
move in the wrong direction when we partially reregulated the 
cable industry? 

Mr. Burton. Neither the council nor I have a position on that. 
[Laughter.] 

Senator Packwood. I think we did. I have no other questions, 
Mr. Chairman. Thank you. 

Senator Inouye. Thank you. Senator Stevens. Senator Lott. 

Senator Lott. No questions, Mr. Chairman. 

Senator Inouye. Senator Gorton. 

Senator Gorton. At this point, obviously, the council does not 
endorse S. 1086? 

Mr. Burton. We do not have a position on S. 1086. 

Senator Gorton. Does it endorse any of the elements in S. 1086? 

Mr. Burton. What the council has endorsed are some principles 
which I would be happy to share with you. There are basically six 
of them, which are as close as we have gotten to resolving some 
of the issues around which legislation must be built. 

The first principle is that the user comes first. The main goal of 
public policy, we think, should be to provide users with the maxi- 
mum possible levels of choice, service, and mobility with due re- 
spect to privacy, confidentiality, and security as well as fair and 
open access. 

The other principles — affordability and ease of use are essential. 
Flexibility and responsiveness to market demand are key to suc- 
cess. The regulatory process must be evenhanded in terms of being 
industry neutral and technology neutral. In fact, a coordinated sys- 
tems approach is important. So, we are looking at R&D programs, 
our procurement policies, and legislation at the same time. 



21 

And finally we think that it is important to take into account 
international concerns about connectivity and competition. 

Senator Gorton. Well, I suspect you might find a broad, perhaps 
unanimous agreement on that set of principles here in this commit- 
tee. We do not write principles, we write statutes, and if you are 
going to be of any help to us you have got to move beyond those 
principles and deal with the particular statutory proposals. 

Mr. Burton. Yes. 

Senator Gorton. If you have these additional 6 months, are you 
going to be in a position in which you will give us specific rec- 
ommendations with respect to this bill, either in its present form, 
subtractions from it or additions to it? 

Mr. Burton. Yes. We hope very much to comment on specifics 
that will be helpful to this committee and others, and let me just 
tell you how our process is working. 

We put together our group in January. We put out our vision 
statement in May. So, we spent 4 months really getting everyone 
together, agreeing on a common vision, a common perspective, a 
common set of key issues. We are now in the process of hitting the 
stone wall of trying to pull the consensus together on specific pro- 
posals, propositions, priorities. 

I think we will continue that process really over the next year 
and release statements focusing on specific policy provisions. We 
are also looking at a series of demonstration projects because we 
think in addition to policy it is very important to demonstrate in 
real terms that this stuff actually works, it has real applications, 
people are going to understand it, and there is a clear demand for 
it. And we will be moving on those issues really for the year and 
a half, and so hope to have a whole series of very specific comments 
for you. 

Senator Gorton. Thank you. Thank you, Mr. Chairman. 

Senator INOUYE. Thank you. Senator Stevens. 

Senator Stevens. No questions. 

Senator iNOUYE. Senator Rockefeller. 

Senator Rockefeller. Mr. Chairman, I will ask a question but 
I am not sure the gentleman will be able to answer it because I 
am not sure he knows the bill. 

You use words like, "America's legal and regulatory bodies are 
fragmented and have not kept up with advances," and "the best 
role for Government is the one that is least intrusive. Government 
regulations should aim to create a playing field that allows for all 
interested parties to exploit market opportunities," et cetera. 

And then in response to a question from Senator Packwood 
which was on the mark, you said that is of concern. Sort of like 
being of counsel, I guess. And my question — ^you know, we did this 
in airline deregulation, and we sort of said, go ahead and have at 
it, let us let things work. And I watched in West Virginia as Amer- 
ican Airlines, United Airlines, and Eastern Airlines all cleared out 
within 2 months. And I fly around commercially on propeller-driv- 
en things with rather low maintenance. 

So, my question to you is from the sort of philosophical principle 
view that you appear to view this short another 6 months, what 
do you see is the difference? Why would not rural areas be picked 
off, as Senator Packwood said, or just lefi; out because the city 



22 

areas and more populous areas would be far more profitable? Why 
would this not be airline deregulation all over again? 

Mr. Burton. First of all, let me say that I understand and can 
relate to your frustration about wanting more specific answers. 

I would posit that what we represent, which we hope will be a 
major contribution, is a consensus. That consensus is forming. We 
think it has come a long way even in the past 3 or 4 months, and 
we hope to give you more specific answers in the future. 

So, I am not ducking your questions, I am really just trying to 
present where we think a broad cross section of the private sector 
stands at present. 

Clearly, when you get into questions of wide scale deregulation, 
broad public access is a key concern. Clearly, issues like cherry- 
picking off the best and most lucrative markets are ones which 
many business concerns would go to immediately. That is where 
the profits are, that is what motivates business activity. 

And so I think there is a role for the regulatory environment in 
making sure that questions of universal access are fairly consid- 
ered and built into the whole process of deregulation that we have 
underway. 

I cannot give you a more specific answer than that at this point, 
but I think we share your concerns. The private sector is on record 
as sharing those concerns, and that is an issue that we hope to ad- 
dress, that we are currently addressing, and we hope to give you 
more specific responses to in the future. 

Senator Rockefeller. Thank you, Mr. Chairman. 

Senator INOUYE. Senator Exon. 

Senator ExoN. Mr. Chairman, I would just like to follow up on 
the general tone of Senator Rockefeller's questioning, and it was 
encompassed in my opening remarks. Can you be any more spe- 
cific, Mr. Burton, as to what your solutions would be? 

We have pretty well established, I think, that there is concern 
here that we could find ourselves in this rush to deregulation back 
into a situation that we found ourselves in with the airline deregu- 
lation. It is very good for the people that live in New York, and San 
Francisco, and Oakland, and Atlanta, and Dallas, and not so good 
for the small communities of the country. Do you have any sug- 
gested frameworks that we should be looking at in that area? 

Go back a little bit further, way back before airline deregulation. 
I think it is generally considered that we would not have in the 
rural communities across this Nation, which are still very impor- 
tant in all States — would not have electricity had it not oeen for 
the Rural Electrification Association. Do you see something of that 
nature as a possible solution to the concern that some of us have 
in this particular area? 

Mr. Burton. I am loath to continue frustrating the committee, 
but we do not have a specific framework or a specific program by 
which we can deregulate and guarantee universal access. I will be 
happy to consider that and take into consideration any specific 
questions that this committee would like to pose to us. 

Senator ExoN. Thank you, Mr. Burton. Thank you, Mr. Chair- 
man. 

I guess the point is that those of us from States that have large 
rural areas are very much concerned about this, and I hope every- 



23 

one fully understands that we do feel that should be addressed, 
and the fact that there is no framework at the present time ex- 
pressed by those whom we are relying on for a lot of advice and 
counsel indicates that we are going to nave to give that a little bit 
more attention. 

Thank you, Mr. Chairman. 

Senator INOUYE. Thank you. Senator. 

Senator Breaux. 

Senator Breaux. Thank you, Mr. Chairman. Thank you, Mr, 
Burton. 

You make the following statement in your council's paper that 
you have produced, and it says, "More than any technology pro- 
gram, the regulatory framework will determine the fate of Ameri- 
ca's information infrastructure. The best role for the Government 
is one that is least intrusive." 

That is really disturbing. I think that if the future of America's 
infrastructure and communication is being determined by a regu- 
latory program as opposed to the type of technology we have, I 
think that is a very important statement, and it is one that gives 
me a great deal of concern that we are going to let the regulatory 
framework determine how fast we advance, as opposed to letting 
technology determine how fast we are able to provide services. 

With that as a statement from the council, would you recommend 
that we do away with the modified MFJ judgment? I mean, that 
would take away the regulatory framework and let technology de- 
termine how fast we can proceed. 

Mr. Burton. You are not going to be surprised by my answer. 
I cannot tell you to take away the MFJ or to leave it in place. We 
do, however, believe that in fact the regulatory environment has 
had an extraordinarily powerful impact on the way that the infra- 
structure is evolving. 

Senator Breaux. Is it a positive impact, or a negative impact? 

Mr. Burton. Well, I think at this point it is hindering the accel- 
erated employment of the infrastructure, and that is what we are 
concerned about. 

Senator Breaux. Is it correct to say that what you are saying is 
that we have the technology but that is being hampered by the reg- 
ulatory framework that we operate under? 

Mr. Burton. Yes. Much of the technology exists. 

Senator Breaux. We could do a lot more if we were not restricted 
by arbitrary rules and regulations. 

Mr. Burton. The regulatory environment could do a lot more to 
accelerate deployment of the infrastructure. 

Senator Breaux. Our challenge is to find out how to do that. 

Mr. Burton. Yes, sir. We hope to help you in that process, even 
though we still have a ways to go. 

Senator Breaux. You apparently have the same problem. I think 
the frustration, Senator Rockefeller, is pointing out apparently — I 
mean, do you not represent almost all the players in this business? 

Mr. Burton. The purpose was to represent the major players in 
this business, and we really have tried to get them together. We 
are meeting on a very regular basis with a full committee. We then 
have a subcommittee on competition policy, another one on public 
access issues, and another one on demonstration projects. 



24 

Senatx)r Breaux. But is that not as close to an impossible task 
as you could find? 

Mr. Burton. It is difficult, surely. I think, however, if you look 
at this industry, over the past year, given the great advances that 
are being made technologicallv and what some of our foreign com- 
petitors are doing, there is nopefully some new opportunity for 
some consensus. It is our intent to develop that consensus and pro- 
vide you with it here on the Hill. 

Senator Inouye. Thank you. Before I call upon Senator Robb, I 
would like to note that there is a vote in process at this moment. 
After Senator Robb has completed, we will call a short recess. 

Senator Robb. 

Senator RoBB. Thank you, Mr. Chairman, and I will be very 
brief. I think I have some reasonable expectation of the responses 
to some of the questions to this point. Let me see if I can be even 
a bit more general than some of my colleagues. 

A relatively well-known Virginian, Mr. Jefferson, is purported to 
have said at one point or another that that Government governs 
best that governs least, or something to that effect. Would that 
general philosophy guide your approach to this problem? Without 
any specific reference to even eliminating MFJ or taking the Gov- 
ernment out of the regulatory environment altogether, but would 
ultimately a level playing field, in your judgment, be defined by a 
lack of Government participation? 

Mr. Burton. We believe that the policy which will accelerate the 
deployment of the infrastructure most rapidly is the one that will 
move toward freer market competition. 

Now, that is not to say that we expect for all Government regula- 
tions to be completely eliminated. Given the long history, that is 
probably unrealistic, but we think a reliance on market forces and 
letting the technologies, the industries, and the applications be 
sorted out in the marketplace is the best path for the United 
States. 

Senator Robb. Mr. Chairman, I think we have probably ex- 
hausted this particular topic in terms of what we are going to get 
at least at this particular time, and with the vote already in 
progress I will yield back any time so that we may cast our votes 
and return. 

Senator Inouye. Thank you very much. Senator Robb. 

Mr. Burton, thank you very much for your participation this 
morning. I realize the answers are not easily forthcoming, but I be- 
lieve that is the nature of this measure beiore us. It is a very dif- 
ficult one. We hope we will be able to resolve some of the problems 
we have to face. With that, once again, thank you very much. 

Mr. Burton. Thank you, Mr. Chairman. 

Senator Inouye. Before I call the recess, will Mr. Crowe, Mr. 
Roberts, Mr. Ware, Mr. Coe, Mr. Niggli, Mr. McBee, and Mr. 
Frischkom take their places to be ready when we return, and with 
that the hearing will stand in recess. 

[A brief recess was taken.] 

Senator Inouye. On our first panel, we are pleased to have with 
us the chief executive officer of the Metropolitan Fiber Systems of 
Omaha; Mr. James Q. Crowe, the president of Comcast Corp. of 
Philadelphia, PA; Mr. Brian L. Roberts, the manager of Garden 



25 

Valley Telephone Co. of Erskine, MN; Mr. Lawrence C. Ware, a di- 
rector of Merchant Acceptance Strategy of Visa International; Mr. 
Kermit Coe, the senior vice president of Entenergy Corp. of Little 
Rock, AR; Mr. Michael Niggli, the vice chairman of United States 
Telephone Association of Washington; and Mr. Gary McBee, and a 
representative of the Telecommunications Industry Association, 
Mr. Allen "Mike" Frischkom, Jr. 

Gentlemen, I thank you all for your participation this morning. 
May I first call upon Mr. Crowe? 

STATEMENT OF JAMES Q. CROWE, CHIEF EXECUTIVE 
OFFICER, METROPOLITAN FIBER SYSTEMS 

Mr. Crowe. Chairman Inouye, Senators, I am James Crowe, 
chairman and chief executive officer of MPS Communications Co. 
We are a new company that the FCC lists as the largest competi- 
tive local provider of phone services. Over the last 3 or 4 years we 
have raised and committed nearly $750 million to install fiber optic 
facilities in local exchanges in 14 metropolitan areas. 

While I freely admit that we have strong views, they are at least 
views founded on practical experience with many of the issues 
dealt with in this measure, and I am honored today to enthusiasti- 
cally support the bill. I believe it can be a vital part of a national 
communications policy and has implications for American jobs, 
American competitiveness, and our standard of living for decades 
to come. 

Today, our Nation leads the way in the race to realize the prom- 
ise of tne age of information. However, the race is far from over, 
and around the world nations are moving quickly to harness the 
power of the private sector to improve their communications sys- 
tems and compete with us more effectively. 

These nations have learned from America that when technology 
and markets change, innovation comes from competitive markets, 
not from regulated monopolies. I believe another clear lesson of 
American history is that when technology and markets change rap- 
idly, important innovation often comes from the hothouses of entre- 
preneurial companies, not large, mature, slow-moving enterprises. 

This has certainly been the case in our computer industry and 
our software industry, where icons of American business have fall- 
en, to be replaced by vital new enterprises, and America is the win- 
ner in this process. And now, in the communications industry, the 
irresistible forces of changing technology and changing markets are 
creating opportunities for today's new entrants, who will certainly 
be tomorrow's success stories. 

Even though companies like my own have found opportunities to 
compete in a narrow range of services, typically those which are 
regulated by the procompetitive FCC, many cities and States cling 
to a monopolistic vision of communications promoted for decades by 
the consolidated Bell System. 

This misguided view allows exclusive preferential treatment of 
local monopolies, and as a result, progress in upgrading our com- 
munications infrastructure is held hostage to a patch quilt of mu- 
nicipal and State regulation. This unacceptable situation is obvi- 
ous, I believe, to the drafters of the bill, and they seek to rectify 
this situation. 



26 

The benefits of more open competition can be clearly seen in the 
long-distance industry. Competition has spurred the almost contin- 
uous replacement of older technologies by advanced systems. Vast 
sums have been spent improving the quality of service, sums pro- 
vided by the private sector to build the interstate highways, if you 
would, of our Nation's communications system. Contrast this with 
the local exchange, the on-and-oflf ramps of the network. 

Until recently, the baby Bells have refused to modernize their 
antiquated copperplate without a virtually guaranteed return on 
that investment. They have demanded over and over that they be 
allowed to enter new markets such as manufacturing and long dis- 
tance, even though their monopoly controlled bottleneck facilities, 
coupled with a clear history of predatory practices, makes this un- 
wise public policy until customers have a choice of local providers. 

What little progress has been made in upgrading their facilities 
has come only when forced by competition from companies like 
MFS. There is more than a touch of irony in the fact that the baby 
Bells, with enormous cashflows extracted from ratepayers by a le- 
gally sanctioned monopoly, have chosen to invest this cash in up- 
grading the telephone systems of foreign countries while private 
capital is eager and unable to invest here in America. My company 
and many others are ready to invest in this American opportunity 
if given a chance. 

As drafted, the bill contains many of the measures necessary to 
ensure the benefits of competition are realized. However, I would 
respectfully submit that two changes, both, I believe, consistent 
with the bill's intent, would greatly improve the opportunities for 
competition to flourish. 

First, the bill should be expanded to mandate access for all com- 
petitors to utility-owned facilities such as poles, conduits, and ac- 
cess to buildings. Today, monopoly phone companies, cable compa- 
nies, and other utilities either refuse such access outright or im- 
pose outrageously high fees for the use of these bottleneck facilities 
installed by ratepayer dollars. 

Second, this measure should end discriminatory assessments of 
franchise fees and rights-of-way charges by municipalities. Cur- 
rently, companies like MFS pay fees as high as 14 percent of total 
revenues to municipalities while monopoly phone companies gen- 
erally pay nothing. Both these modifications are more fully devel- 
oped in my written testimony. 

I greatly appreciate the opportunity to testify in strong support 
of the bill. The good news is that the Nation's goal of universal ac- 
cess to a vast array of information can be promptly accomplished 
by private capital. Companies such as MFS stand ready to continue 
to make the investment necessary to improve not only the informa- 
tion highways but the on-and-off ramps to the network. 

This bill will spur investment by removing antiquated and mo- 
nopolistic barriers to competition. When enacted, competition can 
be counted on to drive technological advancement and industrial 
creativity and to help ensure America leads the world into the In- 
formation Age. 

Thank you. 

[The prepared statement of Mr. Crowe follows:] 



27 

Prepared Statement of James Q. Crowe 

Mr. Chairman and members of the Subcommittee, I am James Q. Crowe, Chair- 
man of the Board of Directors and Chief Executive Officer of MFS Communications 
Company, Inc. ("MFS"). I am honored to testify today in support of Senate Bill 1086 
("S. 1086"). My company's own short history evidences the many benefits of competi- 
tion and innovation in the local telecommunications market ana the compelling need 
for a comprehensive national policy promoting market entry in all facets oT tele- 
communications. My presence on this panel is itself confirmation that local tele- 
phone service is decidedly not a natural monopoly and demonstrates that when anti- 
quated and obsolete legal barriers to local telecommunications competition are 
eradicated, the private sector will respond forcefully with the investment and inno- 
vative services now required by the American people. 

MFS commends Senators Inouye and Danforth for reco^izing in S. 1086 the fal- 
lacy of the natural monopoly mytn for local telephone service and for taking the bold 
and decisive action necessary to encourage open entry for all telecommunications 
services. The bill would remove obstacles to competition by mandating meaningful 
interconnection and interoperability and by encouraging number portability, recip- 
rocal compensation and otner competitive safeguards, including, most importantly, 
the removal of outdated state and local legal barriers to competition. The bill would 
also achieve the delicate, and often difficult, balance between unleashing competi- 
tion through legislative directives and imposing restrictive government standards, 
which could have the unintended efTect of stymieing advanced technology and natu- 
ral market segmentation. Along with our overall support for the pro-competitive 
measures in S^ 1086, MFS proposes amendments to tne bill that, consistent with 
the bill's overall thrust, would eliminate two prohibitive barriers to a truly competi- 
tive local telecommunications environment. As discussed below, these amendments 
would: (1) prohibit telephone companies and other utilities from charging discrimi- 
natory rates for the use of conduit and pole attachments among similarly situated 
telecommunications carriers; and (2) prohibit municipalities from discriminating 
among telecommunications carriers in levying franchise fees and right-of-way 
charges. 

THE NFS COMPANIES 

MFS is a leading provider of telecommunications services for the business commu- 
nity and the nation s largest competitive local telecommunications service provider, 
offering a wide variety of sophisticated voice and data services in competition with 
local telephone companies. In addition, MFS has forged the path for competition in 
the local telecommunications market. In four years, MFS' subsidiary, MFS Telecom, 
has grown from a company with a single fiber optic network in Baltimore to a multi- 
faceted telecommunications service provider with almost 600 employees and fiber 
optic networks in fourteen major metropolitan areas. Over that same period, the 
companies' sales have, on average, doubled every six months. 

Consistent with the underlying themes of S. 1086, the rapid development of MFS 
and other competitors demonstrates that technological innovation, enhanced net- 
work reliability, improved service quality and future job growth are most often gen- 
erated by small and medium sized entrepreneurial companies — not by large tele- 
communications providers wedded to a blind adherence to regulated monopoly. How- 
ever, the true potential of competition cannot be realized until all barriers to com- 
petition are removed. 

Indicative of the responsiveness and market leadership of entrepreneurial tele- 
communications entrants, MFS recently introduced several new service offerings 
specially tailored to meet the unique telecommunications needs of small and me- 
dium sized businesses and the increasingly complex high speed computer 
networking needs of both large and small business users. Many of these services 
and customer applications were not offered by the local exchange carriers prior to 
their introduction by MFS. Specifically, MFS' subsidiary, MFS Intelenet, provides 
advanced telecommunications services to small and medium sized businesses as a 
single source for comprehensive telecommunications services, making available to 
smaller users quality and pricing levels that are comparable to those available to 
larger communications users. MFS Intelenet began providing this comprehensive 
telephone service in New York City earlier this month. 

Through its subsidiary, MFS Datanet, MFS recently introduced an innovative 
service which permits businesses to transport data between buildings, across town 
or across the nation by connecting local area networks ("LANs") with telecommuni- 
cations facilities that transmit data at "native LAN speeds." These services allow 
personal computers and workstations on one LAN to communicate with personal 
computers and workstations on another LAN at the full, uncompromised speed at 



70-334 0-94-2 



28 

which computers on the same bAN can communicate, allowing for the development 
of a wide array of new productivity-enhancing multimedia applications. MFS 
Datanet's services are offered at a variety.of data transmission speeds to allow cus- 
tomers to choose the level which best satisfies their needs. In adcution to high-speed 
LAN interconnection, MFS Datanet offers data telecommunications for mainframe 
computer channel extensions, high-speed remote file backup, file transfer and a va- 
riety of other purposes. The favorable response these services have received from 
the business community shows that, given proper competitive signals, private inves- 
tors will ensure the development of information highways in ways that most effi- 
ciently and effectively meet users' needs. 

P\irther, MFS, through its Network Technologies subsidiary, provides network 
systems integration services. In addition to constructing MFS' fiber optic networks, 
Network Technologies offers network systems integration services and turn-key fa- 
cilities management services. These network integration projects include remote 
interactive learning facilities ("distance learning"), combined cable television-tele- 
phone networks and intelligent vehicle hi^way systems. 

COMPETITION HAS DEBUNKED THE MYTH OF A NATURAL MONOPOLY IN LOCAL 
TELECOMMUNICATIONS SERVICES 

If S. 1086 accomplishes one thing, it conclusively shows there are no inherent or 
technical barriers to full-fledged local competition. Yet, historically, many legislators 
and regulators believed the reverse. Contrary to popular belief, the history of the 
local exchange telecommunications market is not one impressed with the concept of 
a natural monopoly. Rather, in many respects, it is the history of entrepreneurial 
companies and innovation. The industry began not with large established companies 
but with the then-embryonic AT&T and other entrepreneurial upstarts. As with 
computer technolo©r and other growth industries, important conmiercial innovation 
oflen comes from the hothouse of entrepreneurial companies, not large mature en- 
terprises. Government's greatest contribution to these companies oflen is eliminat- 
ing unnecessary and outmoded market-constricting regulations and permitting these 
entities to reach their full market potential. It is a lesson that sometimes seems lost 
on the entrenched telephone monopolies and many state and local telecommuni- 
cations policymakers, but one that fortunately is recognized by the draflers of S. 
1086. 

To understand the economic bankruptcy underlying much state and local tele- 
conununications regulation, it is important to understand that the Bell System was 
not built on a legally sanctioned "natural monopoly." Rather, it was devised nearly 
one hundred years ago by the actions of two men: the President of AT&T, Theodore 
Vail, and J.P. Morgan, its financial controlling partner. Morgan used control of cap- 
ital markets to assist Vail in persuading independent telephone companies to sell 
out to the Bell System. Refusal to interconnect independent telephone companies to 
the Bell-controlled long distance network was a favorite tactic. (Indeed, refusal to 
interconnect has remained a persistent theme in telecommunications history.) This 
conduct continued until 1913 when the Bell System agreed to cease these practices 
in return for de facto governmental ratification of the Bell System's monopoly in 
long distance and in its local service territories. The Bell System subsequently em- 
braced profit regulation (rate-of-retum regulation) by the government in return for 
a monopoly franchise. This local monopoly concept was quickly memorialized and 
replicated nationwide in state public utility laws and other statutes. 

In the 1970s, the Bell System, now firmly entrenched, began to fail satisfying cus- 
tomer needs for two interrelated reasons: silicon and market segmentation. As tech- 
nology exploded, in the form of silicon-based integrated circuits and optical fiber, as 
communications needs began to migrate from commodities like switched voice min- 
utes and began to segment and statify, the Bell Systems' muscle-bound, bureau- 
cratic nature became an impediment to progress. Tne inability of the Bell System 
(or, for that matter, any single entity) to respond rapidly to changes in technology 
and customer demand for teleconununications services provides indisputable evi- 
dence that neither the long distance market nor the local exchange market is a nat- 
ural monopoly. Simply put, when customers' needs and technology change, society 
is far better served by a diversity of choices delivered by a competitive market. S. 
1086 recognizes this economic reality and, if enacted, will make tne promise of tele- 
communications plurality and diversity a reality. 

Indeed, economic history clearly demonstrates that, when markets and technology 
change rapidly, customer demand will almost inevitably result in competition, even 
if opposed by the entrenched forces of the status quo. Thus, demand for more cost 
effective long distance service and the advent of microwave transmission technology 
led to competition in interexchange services even though at the time regulatory boa- 



29 

ies provided scant encouragement to MCI and other "Sipstarts." Similarly, the intro- 
duction of optical technology and customer demand for secure, high bandwidth serv- 
ices led directly to the start of the limited competition now present in local special 
access and private line services. 

These same forces — rapidly changing markets and technologies — are still at work 
and, in fact, the pace of change is accelerating. Telecommunications markets are 
stratifying. Residential users want mobility and more diverse and personally tai- 
lored communications and entertainment. In business and government mariiets, a 
sea change is occurring. Men and women, machine and information are forming an 
interconnected web across the entire nation. When the switched network outside 
buildings can support transmission speeds that so far have been limited to local 
area networks inside buildings, the nation will benefit from advances in learning 
and productivity that we are just beginning to explore. As S. 1086 correctly recog- 
nizes, these forces — stratifying customer needs, technological advancements and 
product innovation — over time certainly will overwhelm any attempts to sustain the 
regulatory sanctioned exclusive franchises held by inefficient, tecmiically outmoded 
local exchange companies that have never been driven by the needs of the market. 

As the drafters of S. 1086 clearly understand, competition in the local exchange 
maricet is both inevitable and desirable. As in the long distance market, I expect 
that we will soon see, following enactment of this bill, a considerable number of new 
entrants employing diverse technologies to serve specific customer needs. It will in- 
clude many players, each organized more around markets rather than around regu- 
latory fiat. This time, however, if legislation and regulation permits, fiiture industry 
leaders will be positioned more to serve customers' needs than geographic, technical 
or legal precedent. More than any other measure in recent memory, S. 1086 is an 
important step towards this inevitable reshaping of the industry. 

PRIVATE CAPITAL, NOT RATEPAYER OR TAXPAYER DOLLARS, WILL FUND THE 
DEVELOPMENT OF OUR TELECOMMUNICATIONS INFRASTRUCTURE 

While government can certainly be a positive force in eradicating barriers to 
entry, central government planning in the selection and endorsement of technologies 
and investment strategies can often unintentionally stifle innovation and creativity. 
Nowhere is this phenomenon better illustrated than in the decision whether to fund 
future network construction through, on one hand, public financing and ratepayer 
subsidization or, on the other hand, private investment. 

Today, thanks in large part to vigorous long distance telecommunications competi- 
tion and the unrestrained development of technology, an infrastructure of nation- 
wide information superhighways connecting users throughout the United States is 
already in place. It is the local "on and on ramps and the metropolitan beltways 
that are the current bottlenecks and are in need of fiirther expansion and mod- 
ernization. Fortunately, as evidenced by MFS and other providers, this construction 
has been and can be accomplished through private investment — not by tsixpayers or 
ratepayers — but it requires the removal of long-embedded roadblocks to competition 
in the local telecommunications maricet. 

The promise of competition is that the cost of facilities and the task of creating 
employment opportunities will be borne by the private sector with an efficiency and 
perseverance that can not be matched by Government financing and which can be 
thwarted by regulatory policies that handicap technologies and industry partici- 
pants. To paraphrase recent remarks by Commissioner Ervin Duggan of the Federal 
Communications Commission ("FCC"), the welcomed news in this time of budget 
austerity is that, when it comes to building new communications infrastructure, pol- 
icymakers can call forth billions of dollars for investment, create immense public 
benefits and fuel economic growth without spending public money. As Commissioner 
Duggan correctly stated, this future construction can be accomplished "through in- 
telligent regulatory behavior that inspires a private response." 

Equally important to ushering in competition is that aU service providers have the 
flexiDility and market opportunities to apply technological changes without encoun- 
tering and being forced to overcome artificial regulatory hurdles. Government 
should not seek to dictate technical standards or construction schedules. Govern- 
ment-mandated technology standards will almost certainly be superseded rapidly by 
the furious pace of technological change. The computer industry aptly illustrates the 
incentive for innovation generated by competition and fostered by the absence of ar- 
tificial regulatory obstacles. If government had attempted to dictate or handicap 
technology for the computer industry, we would not have the explosion and blinding 
range of computing devices and applications we have today. There would be no 
Microsofts, Intels or Apples. Conceivably, the dire predictions of the inevitable de- 
cline of the U.S. chip-making and computer industries often voiced before Congress 



30 

less than a decade ago would have occurred. Instead, the power of competition cou- 
pled with American innovation has reinvigorated our high-tech industries and made 
them the envy of the world. Individual corporations — some icons of American indus- 
try — ^have declined and lost the race. But it is clear that America and American 
workers are the winners. 

Open entry and competition provide the very market opportunities that the pri- 
vate sector craves — the opportunity to invest and respond with innovative products 
to meet a market demand that is currently underserved and, in some instances, 
unserved. MFS alone has invested almost 500 million dollars in building nearly 
50,000 fiber miles of local "on and ofT ramps for users to access intercity and inter- 
state information sujjerhighways. We plan to double this number in the near term. 
However, our previous accomplishments are but a tiny fraction of the benefits that 
could be realized if outmoded, restrictive regulations gave way to government-en- 
couraged competition. Indeed, the primary lesson we can draw from the history of 
competition in the long distance market, as well as from the overwhelming response 
of users to entrepreneurial providers of competitive services such as MFS, is that 
thoughtful government action can unleash the capital resources of the private sec- 
tor, while preserving and enhancing affordable universal service and dispelling the 
fiersistent myth of a natural monopoly, as embodied in many hoary state and local 
aws. 

A NATIONAL TELECOMMUNICATIONS POUCY IS CRITICAL TO ELIMINATING ARCHAIC BAR- 
RIERS TO MARKET ENTRY AND ADVANCING COMPETITION IN THE PROVISION OF ALL 
TELECOMMUNICATIONS SERVICES 

The fruits of competition will never ripen if competitors are strangled by a thicket 
of inconsistent and antiquated state and local laws premised on an historically obso- 
lete economic theory. MFS therefore strongly endorses a coordinated national policy 
advancing open entry and competition for all telecommunications services, as re- 
flected in S. 1086. Indeed, a comprehensive national policy is essential to ensure 
that all Americans reap the benefits of fuU competition and universal service. Ab- 
sent a coordinated national policy promoting open telecommunications entry, the de- 
ployment of a nationwide advanced infrastructure will depend on the uncoordinated 
and ad hoc efforts of all 50 states and the District of Columbia. Competitive 
progress in some jurisdictions may not occur for at least a decade. States still im- 
bued with the natural monopoly myth and resistant to competition will effectively 
deny their residents, for many years, the benefits of an advanced infrastructure and 
unfortunately will baUcanize the United States into information "haves" and "have 
nots." 

Notwithstanding any currently valid technical or economic rationale, many states 
nostalgically continue to cling to the monopolistic vision of local telecommunications 
services advocated decades ago by the then-consolidated Bell System, but long since 
outdated by technology and segmentation of the telecommunications market. Even 
though MFS has found opportunity to compete for narrow segments of the national 
telecommunications market, many laws, rules and regulatory policies are still pre- 
mised on a single provider model. That misguided paradigm allows exclusive or 
preferential treatment of the incumbent local telephone company, not-because of be- 
lief in the efficiency of monopoly, which is surely seen as oxymoronic by virtually 
all thoughtful observers, but simply as a vestige of its historical role as the sole pro- 
vider. Unlike many historical myths, this one sadly has the effect of repressing efii- 
cient competition and of increasing costs for telecommunications users and society. 

The benefits of competition have already been demonstrated in the limited mar- 
kets in which competitive local carriers, such as MFS, have operated to date. Com- 
pared to the entrenched local carrier, MFS has significantly condensed the time re- 
quired to initiate new services, reduced installation intervals, decreased repair time, 
offered a wider array of services, increased emphasis on quality, and accelerated de- 
ployment of fiber. For example, in the area of transmission quality, the BellCore ob- 
jective for a standard type of high capacity circuit (a "DS-1") is one error per one 
million bits of information. The MFS objective is one error per one billion bits of 
information or one thousand times better than the BellCore standard. 

As a result of competition, we are more than a little proud to note that some local 
exchange carriers now advertise DS-1 capacity service comparable in quality to 
MFS' service in select areas. Current market conditions demonstrate unequivocally 
that MFS and other competitors have acted as a widespread competitive spur to- 
ward local exchange carriers. Since the advent of competition, monopoly local ex- 
change carriers have begun to offer more reliable and secure network features, in- 
cluding redundant electronics and diverse routing. 



31 

Similarly, the pricing of telecommunications services has changed significantly in 
recent years. For example, five' years ago, monopoly local exchange carriers were 
arguing before the FCC for the ability to set interstate DS-1 rates at "strategic" lev- 
els, i.e., levels admittedly well in excess of cost.i Within two years, however, after 
competitors began to enter limited markets, the local exchange carriers drastically 
and nearly uniformly reduced their interstate DS-1 rates. Significant rate reductions 
are also evidenced in rates for intrastate services where competition exists. 

Competition is also fully compatible with the important goal of universal service — 
an objective which MFS fully shares. There is simply no reason to believe and no 
evidence to support the claim repeatedly chanted by entrenched monopoly providers 
that the introouction of competition into the remaining monopoly local telecommuni- 
cations markets will impair universal service. While certain local exchange carriers 
imbued with the myth of a natural monopoly reflexively assert that competition will 
result in increased residential rates or the impairment of universal service, none 
has proven it. Moreover, whatever the hypothetical argument may be, the real world 
experience of states like New York and Illinois which nave permitted increased lev- 
els of competition simply does not support the LEG position. In fact, MFS has con- 
sistently supported the right of all Americans to arfordable local communications 
and has proposed an open universal service subsidy funded by all industry 
particpants and administered on a fair and equitable basis by a neutral entity. 

INTERCONNECTION IS ESSENTIAL TO THE CREATION OF MEANINGFUL LOCAL 

COMPETITION 

S. 1086 properly recognizes that the economical interconnection of competing net- 
works at all feasible technical points is a prerequisite for meaningful competition 
in the local exchange. The critical importance oi interconnection as a gateway to 
competition and to the elimination of the local exchange bottleneck has been em- 
braced by the FCC and is being recognized increasingly by enlightened state regu- 
lators. As recognized in S. 1086, the public interest requires that all users of tele- 
communications services be able to communicate with all other users, and with all 
locations in the state, regardless of which carrier's network serves the customer's 
particular location; this ability in turn requires that all networks be interconnected 
on economically reasonable and rational terms. Unfortunately, the intrastate car- 
rier-to-carrier interconnection arrangements that exist today are not generally suit- 
able for competitive local carriers and local exchange carriers naturally have no de- 
sire or incentive to enter voluntarily into new arrangements with companies that 
seek to compete with them. 

Forward-looking telecommunications policymakers have long recognized the 
central importance of equitable and cost-effective interconnection as they guided the 
introduction of competition in other markets. In the 1970s, the former Bell System 
attempted over a period of years to repeatedly deny its infant long distance competi- 
tors access to its local exchange facilities. As the District Court in the AT&T divesti- 
ture case explained, "meaningful competition in the provision of intercity services 
is precluded unless the non-Bell carriers are able to obtain interconnection with the 
Bell local distribution facilities under non-discriminatory terms and conditions.2 
Moreover, the success of the cellular telephone industry was made possible in large 
part by early FCC actions mandating efficient interconnection to the landline tele- 
phone network, althou^ this process required repeated regulatory intervention. 

A similar, if not more pressing, need for coordinated national policy leadership ex- 
ists in the local telecommunications market. Local exchange carriers currently con- 
trol ubiquitous transmission and distribution facilities that pass every residential 
and business premise in the nation. Competitors will have no viable opportunity to 
offer local services to the general public, as opposed to highly limited and select 
groups of customers, without cost-eiTective access to existing local exchange carrier 
networks. S. 1086 recognizes this need and provides all competitors the necessary 
safeguards and access to monopoly facilities and resources that will offer them the 
opportunity to succeed. 

PROPOSED MODIFICATIONS TO S. 1086 

S. 1086 contains many critical ingredients for meaningful local competition, in- 
cluding ensuring that all providers have access to telephone number allocations, al- 
lowing customers to change service providers while retaining their telephone num- 
bers and mandating efficient technical and administrative network interconnections. 



iSee generally, Investigation of Sf)ecial Access Tariffs of Local Exchange Carriers, 4 FCC Red. 
4797 (1988") 

^United States v. AT&T, 524 F. Supp. 1336, 1352 (D.D.C. 1981). 



32 

In addition to the competitive safeguards included in S. 1086, MFS strongly encour- 
ages this Subcommittee to consider the following modifications to the bill that will 
eluninate two of the most pernicious vestiges oT the monopoly past that have se- 
verely discriminated against competitive local telecommunications providers. These 
{)rovisions, which MFS believes are fully consistent with the overall thrust of the 
egislation, involve: (1) discriminatory conduit rental fees and pole attachment rates 
charged by telephone companies and other utilities to similarly situated tele- 
communications carriers; and (2) the discriminatory assessment of franchise fees 
and right-of-way charges by municipalities on similarly situated telecommunications 
carriers. 

As Robert Allen, Chairman of AT&T, recently stated in specifying the recpiire- 
ments for effective competition: 

I am talking about such things as eliminating franchises; eliminating local 
telephone company control of "rights of way." I'm talking about allowing com- 
petitors to interconnect fuUy with the local exchange networic — not just special 
access; and unbundling of transport, local-loop, switching and other service ele- 
ments. I'm talking about cost-based rates — unburdened by unnecessary sub- 
sidies; and portable telephone numbers that give consumers real choice. * * * 
In short, we have to dismantle the barriers to entry. We have to provide op- 
portunities for entrepreneurs t6 compete and for end users to have choice. And 
we have to set objective levels that are measurable — levels that, once met, clear- 
ly signal that the local market has become competitive.^ 
MFS respectfully submits that these additional barriers to competition inhibit 
entry into the local telecommunications mariiet by subjecting competitive service 
providers to unreasonable and discriminatory fees not paid by their competitors. 
MFS suggests that S. 1086 be can expanded logically to incorporate these significant 
safeguards. 

1. Non-Discrimination in Pole Attachment Rates Charged by Utilities to Tele- 
communications Carriers and Cable Television Systems 

Pole attachment rates and conduit rental fees together comprise one of the largest 
recurring costs borne by a competitive telecommunications carrier. Competitive local 
carriers are often charged rates that bear no relation to the cost of supporting the 
attachment and that are substantially higher than the rates utilities charge cable 
television systems and their affiliated competitive local access providers. S. 1086 be- 
gins to ameliorate discrimination in access to pole, conduit, duct and right-of-way 
space in Section 229(cX3). This section directs the FCC to prescribe regulations re- 
quiring each telecommunications carrier to provide any entity that provides tele- 
communications services or information services, on reasonable terms and condi- 
tions, nondiscriminatory access, where technically feasible, to poles, ducts, conduits 
and rights-of-way owned or controlled by the telecommunications carrier. 

In order to meaningfully eliminate discrimination in access to pole attachments 
for competitive local telecommunications providers, MFS recommends that this pro- 
vision be modified in two ways. First, the nondiscrimination requirement of Section 
229(cX3) should be amended to include poles, ducts, conduits, and rights-of-way pro- 
vided by all utilities, not just telecommunications carriers. Second, in response to 
a 1991 decision by the FCC under the Pole Attachments Act (recently upheld by the 
Court of Appeals),'* Section 229(cX3) should be modified to explicitly bar utilities 
from discriminating in the price, terms and conditions for the provision of conduit 
space and pole attachments between independent entities providing telecommuni- 
cations services and similarly situated entities affiliated with cable television sys- 
tems. These two modifications would extend, in a nondiscriminatory manner, the 
regulatory protection against excessive conduit and pole attachment rates assured 
under the Pole Attachments Act to aU similarly situated providers of telecommuni- 
cations services. 

The same discriminatory and anticompetitive practices that prompted Congress to 
enact the Pole Attachments Act in 1978 in an effort to protect cable television sys- 
tems are now faced by independent competitive local telecommunications providers. 
In 1978, Congress enacted the Pole Attachments Act in direct response to concerns 
that telephone companies and electric utilities would use their control over poles — 
as well as duct ana conduit — to charge cable television systems unjust and unrea- 
sonable rates for pole attachments and use of conduit. Congress was justifiably con- 
cerned that conduit rental fees and pole attachment rates charged by such utilities 



3 Remarks of Robert E. Allen, Federal Communications Bar Association/Practicing Law Insti- 
tute Conference, Washington, D.C. (December 3, 1992). 

4447 U.S.C. §224; Heritage Cablevision v. Texas UtUities EUc Co., 6 FCC Red. 7099 (1991); 
afTd., Texas UtUities Electric Co. v. FCC. No. 92-1032 (June 25, 1993). 



33 

would make cable services prohibitively expensive for most users or result in the 
complete absence of such service in the most extreme cases. Under the Pole Attach- 
ments Act, cable television system operators are entitled to seek regulatory review 
of pole attachment rates charged by electric companies and other utilities, including 
local telephone companies. The Pole Attachments Act is not limited to facilities con- 
trolled by telephone carriers. 

Just last month, the U.S. Court of Appeals for the D.C. Circuit upheld a decision 
by the FCC asserting regulatory jurisdiction over an electric utility's pole attach- 
ment rates for a cable television system that provided not only traditional cable 
services but also data transmission services.' The FCC required the utility to charge 
the cable television system a single. Just and reasonable rate for all pole attach- 
ments regardless of their use in the franchise area. As a result of the FCC's deci- 
sion, cable television systems that use their networks to provide voice and data tele- 
communications services will be able to secure regulated pole attachment rates for 
all services in their franchise areas. This lower rate and the attendant regulatory 
oversight is not available to competitive telecommunications providers that do not 
operate as cable television systems but may compete directly with such entities in 
the telecommunications market. 

In the case before the FCC, the electric utility charged separate pole attachment 
rates for traditional cable television and data transmission services. The annual rate 
charged for traditional cable television services was $5.00 per pole; the annual rate 
for non-cable television services was between $50 and $100 per pole.^ MFS routinely 
has been subjected, in a clearly discriminatory manner, to the higher rates for con- 
duit and pole attachments by utilities and telephone companies alike. 

Significantly, in its decision, the FCC recognized that its regulation of all cable 
television system pole attachments would provide cable television system operators 
an advantage over other competitors who are not entitled to regulated rates under 
the Pole Attachments Act. The FCC, however, was evidently constrained by the lim- 
its of its statutory authority: 

We are mindlul of the competitive concerns raised by TU Electric (and MFS, 
citations omitted). However, we cannot refrain from fulfilling our statutory 
mandate to ensure just and reasonable pole attachment rates, terms and condi- 
tions for cable television systems operators, simply because our authority may 
not extend to every competitor in the data transmission market."^ 
In 1978, the Pole Attachments Act was passed in response to the similar determina- 
tion by the FCC that it lacked jurisdiction to adjudicate disputes between cable tele- 
vision system operators and utilities over conduit rental fees and pole attachment 
rates. MFS believes that today, as in 1978, Federal legislation is the only way to 
ensure just, reasonable and nondiscriminatory conduit and pole attachment rates, 
terms and conditions for all entities providing local telecommunications services to 
the public. 

As the distinctions between cable companies and telecommunications carriers con- 
tinue to blur, the difference in these rates will put non-cable providers of tele- 
communications services, such as MFS, at a significant competitive disadvantage. 
Accordingly, MFS encourages this Subcommittee to modify Section 229(cX3) to pro- 
hibit utilities and telecommunications carriers from discriminating in the price, 
terms and conditions of attachments to poles and access to ducts, conduits and 
rights-of-way between different types of entities that provide local telecommuni- 
cations services. 

2. Nondiscrimination in Franchise Fees 

The second source of recurrent discrimination against emerging competitive local 
telecommunications providers is the selective imposition of franchise fees and rights- 
of-way charges by municipalities. Once again, most of these local ordinances are 
rooted in the century-old theory of local natural monopolies, in which the en- 
trenched carrier is thought to be qualitatively superior to any possible entrepreneur- 
ial upstart whose activities must be heavily conditioned and restricted. In many 
metropolitan areas, municipalities prohibit competitive local carriers from crossing 
public rights-of-way unless they first obtain a franchise from the municipality. As 
a condition of the franchise, MFS and other competitive telecommunications provid- 
ers have been required to pay exorbitant franchise fees that are not imposed on the 
local telephone company for virtually identical facilities and services. 

By way of illustration, the City of Pittsburgh has taken the position that MFS 
is required to obtain a "Private Communications System License" from the City. As 



6 Texas Utilities Electric Co. v. FCC, No. 92-1032 (June 25, 1993). 
8 Heritage Cablevision, 6 FCC Red. at 7100. 

7 Id. at 7104 (emphasis added). 



34 

a condition of the license, MFS is required to pay the City five percent of its total 
annual gross revenues derived from customers within Pittsburgh, significantly, the 
City of Pittsburgh has not required Bell of Pennsylvania — with whom MFS directly 
competes using virtually identical fiber facilities — to pay such a fee. In New York 
City, MFS is subject to a franchise fee as high as 14 percent of its total annual gross 
revenues. By contrast, New York Telephone is not required to pay any similar fran- 
chise fee. 

The wide divergence of license and franchise fees imposed by municipalities on 
competitive telecommunications providers is systematic and inhibits true competi- 
tion and the further deployment of fiber optic networks and other advanced tech- 
nologies. K this practice ot discrimination continues, it will directly undermine the 
threshold goal embodied in S. 1086 of providing fair competitive opportunities in the 
provision of aU telecommunications services. Furthermore, discriminatory franchise 
fees will result in fragmented deployment of an advanced telecommunications infra- 
structure and, as with state regmatory barriers to competition, could produce a bal- 
kanized society of information "haves and "have nots . Accordingly, MFS respect- 
fully urges this Subcommittee to amend S. 1086 to require the uniform and non- 
discriminatory application of municipal franchise fees and rights-of-way charges to 
all telecommunications providers. 

CONCLUSION 

I greatly appreciate the opportunity to testify in support of S. 1086 — a biU of criti- 
cal importance to the future of our nation's telecommunications infrastructure. The 
good news is that our national goal of universal access to a vast array of information 
can be promptly accomplished by private investment. Companies such as MFS stand 
ready to continue making the investment necessary to improve not only our nation's 
information highways but also the local "on and ofT ramps and metropolitan belt- 
ways. S. 1086 seeks to accomplish this objective by proposing to remove many of 
the government-mandated, antiquated and monopolistic harriers to competition. If 
thisl)ill is enacted, competition can be counted on to drive technological advance- 
ment and industrial creativity and to help ensure that America leads the world into 
the Information Age. 

Senator Inouye. Thank you very much, Mr. Crowe. We will be 
asking questions after the panel has completed its presentation. 
Now may I call upon Mr. Roberts. 

STATEMENT OF BRIAN L. ROBERTS, PRESffiENT, COMCAST 

CORP. 

Mr. Roberts, Thank you, Mr. Chairman and members of the 
committee. I am Brian Roberts, the president of Comcast Corp. We 
are the fourth largest cable operator, and we are also cellular tele- 
phone operators on the east coast. We are building cable and tele- 
phone facilities in the United Kingdom as well. Aiid I am pleased 
to be here today as an officer of the national Cable Television Asso- 
ciation and to represent NCTA at today's hearing. 

I start by wanting to commend Mr. Chairman and Senator Dan- 
forth for their comprehensive approach to these issues that are 
truly vital to the social and economic future of our Nation. Speak- 
ing for the members of NCTA, I want you to know that we are pre- 
pared to work with you to ensure that America's telecommuni- 
cations infrastructure is second to none, and to get good legislation 
enacted. 

You see magazine covers standing behind us and more news- 
paper headlines every day proclaiming that this is the era of con- 
vergence in telecommunications. And there is, indeed, lots of activ- 
ity and excitement in our field. We are all jockeying for position, 
entering new strategic alliances that cross the traditional bound- 
aries of communications, computers, publishing, and video. There 
is a convergence underway, and I believe you will find cable at its 
center. 



35 

Cable's broadband, coaxial, and fiber optic networks are now 
available to 95 percent of all U.S. homes. The coaxial cable that 
feeds into your TV set can already carry an immense amount of in- 
formation, 900 times more than the telephone company's twisted 
pair. And very soon, that capacity will increase dramatically as we 
install new fiber optic trunks and apply digital compression tech- 
nology. We are also modifying the architecture of our systems to 
improve their ability to carry two-way communications. 

All told, our industry hopes by the end of this decade to nearly 
double our total investment in plant and facilities. We plan to 
spend another $14 billion on system upgrades, and that means eco- 
nomic growth and up to 120,000 new jobs. 

While these technologies are converging, opportunities for com- 
petition among network providers are expanding, and this will ben- 
efit every American. Your bill represents an important initial step 
in defining a policy framework for these changing and converging 
industries. We wholeheartedly agree with your core premise that 
the best telecommunications infrastructure is a competitive infra- 
structure, a network of interconnected networks, wireline and wire- 
less, high and low capacity, fixed and mobile. 

We also strongly support your goal of opening up the local loop 
to competition. This is the one segment of the telecommunications 
industry that has remained a monopoly impervious to competition. 
Right now, well over 99 percent of all telephone calls cross the tra- 
ditional local exchange network, including almost every long dis- 
tance call and cellular telephone call. Right now, for every tele- 
phone user there is no alternative to a local exchange company for 
purposes of connecting with the long distance telephone network or 
dialing across town. 

Right now, all the alternate access carriers, like Metropolitan 
Fiber and Teleport, combined, account for one-tenth of 1 percent of 
the total local exchange revenue market, and are very limited, by 
law, in the services that they may provide. This monopoly should 
no longer be justified and can no longer be justified by the tech- 
nology, and we believe that effective Federal policies can help 
change it. 

Opening local phone service to competition has become a govern- 
ment policy priority in many other nations. We expect local ex- 
change competition will be introduced throughout the European 
Community by 1998, and also in Mexico. And today Comcast is 
participating as a local exchange competitor in the United King- 
dom. The United States should not be playing catchup. We need to 
get back ahead of the pack. 

Mr. Chairman, we endorse your commitment to remove Federal, 
State, and local barriers to local exchange competition, and to pro- 
mote interconnection and equal access to local exchange network 
functions and facilities. However, it is critically important to en- 
sure that local networks are opened up to competition in a consist- 
ent and uniform way. Therefore, we believe the FCC and State reg- 
ulators will need more detailed guidance from you on these issues. 

We also understand, as you do, that competition is not a one-way 
street. It is inevitable, and even desirable from a public policy per- 
spective, that everyone, including local exchange companies, should 
ultimately be free to compete to deliver multichannel video to the 



36 

home, just as in every other aspect of the telecommunications busi- 
ness. 

As technology advances and competition emerges, the question is 
no longer "whether," but "when and under what circumstances." 
But so long as incumbent local exchange companies continue to 
dominate their market, safeguards against phone company abuse of 
its competitors and its consumers remain essential. 

We urge you to go beyond the safeguards in S. 1086 and to adopt 
more specific safeguards such as those contained in a bill, Mr. 
Chairman, that you introduced in the last Congress, S. 2112, which 
established detailed separate subsidiary requirements and provided 
for stricter rules on cost allocation and treatment of intangible as- 
sets. In addition, we believe you should establish a threshold test 
requiring that the local exchange telephone market must be found 
eflfectiveTy competitive before the phone company may enter the 
multichannel video business. 

Last year you reimposed stiff regulation on my industry, cable 
TV, while at the same time taking steps to ensure that cable s mul- 
tichannel competitors will flourish. You insisted that the existence 
of real, effective competition must be demonstrated before the in- 
cumbent cable operator would be deregulated. The phone compa- 
nies, we think, should be treated the same way. They should re- 
main subject to the cross-ownership restriction until the market 
they dominate, local exchange service, is subject to effective com- 
petition. 

Meanwhile, Congress should take steps, as you do in your bill, 
to ensure that the phone companies' new competitors can indeed 
establish themselves. 

There is a fundamental linkage between permitting the local ex- 
change companies into cable and promoting competition into local 
telephone exchange. The most likely providers of competitive local 
exchange services, I believe, are today's cable companies. 

I cannot overstate the State and local barriers to entry that we 
face, and the problems of interconnection, equal access, number 
portability, and standard setting will take years to resolve. Only 
when these problems are solved and competition has really taken 
hold will the phone companies' economic incentive to shift costs to 
monopoly ratepayers be eliminated. Only then should those compa- 
nies be permitted to deliver video within their local exchange area. 

Universal service has been and remains an important social goal. 
We in the cable industry share this committee's commitment to it, 
and if we are given the chance to compete for local phone service, 
we will contribute our share to preserve universal service. I hope 
that you will give me a chance to elaborate on that point during 
the Q&A. 

And finally, your bill appears to bar, without exception, joint ven- 
tures between local exchange companies and cable companies, or 
acquisitions of cable companies by local exchange companies within 
the service area of the local exchange carrier. In some cir- 
cumstances a given market may just not sustain competing 
broadband networks, and it would be unfair to force companies to 
compete uneconomically. We urge you to establish standards to 
permit mergers or acquisitions under requirements that would en- 
sure the public interest is protected. 



37 

If Congress creates the right legal environment, America can 
enjoy a competitive, innovative network of networks offering more 
choices, better prices, and more responsiveness to our diverse 
needs, and today's cable companies will be major participants, we 
hope. But this future depends upon your unswerving determination 
to put competition first, to break down barriers to entry and pro- 
mote interconnection, and to avoid premature elimination of rules 
intended to protect consumers and competitors against abuses by 
local telephone monopolies. 

We think this bill is on the right track. We offer you our help 
as you develop the policies that will make this future a reality. 

Thank you. 

[The prepared statement of Mr. Roberts follows:] 

Prepared Statement of Brian L. Roberts 

My name is Brian Roberts, and I am president of Comcast Corporation, 
headquartered in Philadelphia, Pennsylvania. I am pleased to represent the Na- 
tional Cable Television Association (NCTA), of which I am an elected ofTicer, at this 
morning's hearing on S. 1086, the Telecommunications Infrastructure Act of 1993. 

On behalf of all the members of NCTA, I want to commend you, Mr. Chairman, 
and Senator Danforth for your effort to deal in a comprehensive way with tele- 
communications policy issues that are critically important to the social and eco- 
nomic future of our nation. We support the basic thrust of your proposed legislation, 
and in particular its strong emphasis on promoting competition in the local ex- 
change telephone marketplace, the last remaining bottleneck in our telecommuni- 
cations infrastructure. My company, and all of us in the cable industry, are eager 
to work with you to make sure that the policies Congress adopts will promote effec- 
tive competition and permit American companies to expand their leadership in these 
fields into the next century. 

There is a single objective that every member of this Committee, every witness 
before you today, and every member of the cable television industry share: we all 
want the United States to have a telecommunications infrastructure that is second 
to none, anywhere in the world. There may, however, be difTerences of opinion on 
the best way to reach this goal. 

We in the cable industry agree with you, Mr. Chairman, and you. Senator Dan- 
forth: our nation should rely on a competitive marketplace to deliver to all Ameri- 
cans the widest range of telecommunications services at the best prices. The infra- 
structure model that will best serve America's needs is not a government monopoly, 
nor a private monopoly, but rather a network of competitive, interconnected net- 
works — wireline and wireless, high- and low-capacity, nxed and mobile. The result 
should be a vast telecommunications quilt, composed of many pieces but making up 
an integrated whole, blanketing our nation. 

The essential role of government in deploying our telecommunications infrastruc- 
ture is to make competition work, to create the environment in which the entre- 
f)reneurial spirit can flourish and innovation can thrive, and in which companies 
ike Comcast can make an important contribution to an improved quality of life for 
all Americans. Today, I will oner some of the cable industry s ideas on how to create 
such an environment. 

ABOUT COMCAST CORPORATION 

Let me briefly introduce you to Comcast Corporation. Our company was founded 
some thirty years ago by my father, Ralph Roberts, who has built Comcast into one 
of the nation's truly great cable communications companies, now serving some 2.7 
million subscribers in 19 states. We are also an important "non-wireline" cellular 
telephone provider, serving a contiguous region running from the Newark (N.J.) Air- 
port to the outskirts of Baltimore, including most of New Jersey, Philadelphia, Wil- 
mington, and portions of Maryland. We have also invested in two alternative access 
companies that provide a link-up with long distance services for high-volume busi- 
ness telecommunications users. We also operate cable and telephone systems 
abroad, including combined cable/telephone networks in the United Kingdom that 
provide British consumers a telephone service alternative to British Telecom. We 
are also making important new commitments to wireless communications services 
in the U.S. through our investment in Nextel, which will offer new digital private 
radio services in major urban areas starting later this year, and through our pio- 



38 

neering experiments with "personal communications service" or PCS. Finally, we 
are partners with Barry Dilier and Liberty Media in QVC, a cable home shopping 
service, that is an important platform for the development of new interactive video 
services. 

Comcast, like many other companies whose core business has been cable tele- 
vision, is in the process of restructuring itself for the Twenty-First Century. Our 
goal is to integrate these myriad networks and services in order to provide consum- 
ers with unparalleled choice and convenience. We are putting in place the digital 
platform that will meet the telecommunications needs of generations to come. 

CABLE IS THE BROADBAND SUPERHIGHWAY * * * TODAY 

If magazine covers and newspaper column inches are a fair measure of the impor- 
tance of an issue to the public, tne convergence of telecommunications and related 
technologies certainly ranks high. 

This is a time of great activity and excitement in the telecommunications field, 
as scores of companies jockey for position and enter new strategic alliances that 
cross the traditional boundaries of communications, computers, publishing and 
video. 

America's cable television companies have an important role in that future. We 
already have in place coaxial and fiber optic networks of immense capacity, avail- 
able to 95 percent of all U.S. homes. The coaxial cable that feeds into your TV set 
can carry 900 times as much information as the telephone company's twisted pair. 
That is a powerful connection. As we install new fiber optic trunks over the next 
five years, cable's already great capacity will double, and cable system reliability 
will increase dramatically. Meanwhile, as we apply digital compression technology 
and install new converters in cable homes, channel capacity will increase tenfold — 
to 500 channels or more. And as we modify our cable system architectures to im- 
prove their two-way capability dramatically, we expect an explosion of interactive 
media, giving Americans new ways to communicate, learn, complete commercial 
transactions, and iust enjoy themselves. 

By the end of tnis decade, the cable industry as a whole plans to invest another 
$14 biUion in system upgrades. That represents major technological advancement. 
That also represents economic growth and job creation for America. 

We have provided for the record of this hearing two recent reports by the National 
Cable Television Association that describe cable's role in the information age and 
in the advancement of America's telecommunications infrastructure. As these re- 
ports show, cable television systems, standing alone or interconnected with other 
wireline and wireless networks, are an important part of the technological mix that 
will meet a wide spectrum of residential and commercial telecommunications needs. 
Cable TV systems are providing a ubiquitous broadband superhighway today. 

THE "NETWORK OF NETWORKS" WILL BENEFIT ALL AMERICANS 

Simultaneous with the convergence of technologies is growing competition among 
network providers. The growth of competition in the telecommunications market- 
place will pay dividends for every American. 

Consider the results of the break-up of AT&T almost ten years ago, which pro- 
duced new competition in long distance, telecommunications equipment, and infor- 
mation services. Long chstance rates have dropped dramatically, while quality and 
innovation have improved. The black rotary telephone, stiU commonplace a decade 
ago, is a distant memory, and we enjoy a previously unimaginable proliferation of 
devices — cordless phones, answering machines, fax machines, sophisticated 
multUine phones, and more. The wisdom of relying on competition is confirmed by 
the steady stream of other countries liberalizing their own telecommunications net- 
works. For instance, the European Community has resolved to open up all local ex- 
change services to competition by 1998, and Mexico plans to do the same by 1996. 

As a cable company, we face growing and real competition in our core business, 
as direct broadcast satellites, wireless cable and other multichannel video competi- 
tors enter the marketplace. Government policies are encouraging, supporting and 
nourishing these new entrants. This competition is genuine, it is inevitable, and we 
must all respond to it. 

Now is the time for comparable policies to open up the telecommunications bottle- 
neck that has remained impervious to meaningful competition: the local telephone 
exchange. 

Looking ahead, we believe that technology may eventually make possible new 
entry in the local exchange telephone market, which currently generates $100 bU- 
lion a year in revenues. Americans will get the benefits of new competition in this 
marketplace before most other nations will. And the growth of competition in this 



39 

market will promote, rather than endamger, the important socisil goal of universal 
service, as I will discuss later. 

Before Congress can make appropriate public policy on these matters, it is essen- 
tial to have a realistic grasp of the current state of competition in the local exchange 
market. 

The local exchange network is distinguishable from every other telecommuni- 
cations facility in America. It provides essential switching and distribution services 
upon which every other provider of telecommunication services depends — in short, 
a monopoly. These same companies control the poles and conduits through which 
every other wireline provider of telecommunications services must pass. And this 
will not change overnight. 

Right now, well over 99 percent of all telephone calls cross the traditional local 
exchange network, including almost every long distance call and almost every cel- 
lular call. Right now, for virtually every telephone user, there is no alternative to 
the local exchange company for purposes of connecting with the long distance tele- 
phone network or dialing across town. Right now, all the alternative access carriers 
combined account for about 0.1 percent oi the total local exchange revenue market. 

This is a simple, numerical refutation of the argument that new entry by cable, 
cellular, or any other technology threatens the revenue base of local telephone com- 
panies now or in the immediate future. Quite the contrary — new entrants will mean 
market growth and increased demand, and this will drive the local phone companies 
to improve service, reduce costs and respond to the market. Every increase in traffic 
on alternative carriers means more incremental revenues for the local exchange 
company whose facilities are still essential to the completion of every call. 

By the same token, regulations premised on the existence of a local telephone mo- 
nopoly are still entirely appropriate. Local exchange companies will retain the abil- 
ity to abuse consumers and competitors until such time as their bottleneck is elimi- 
nated. The facts are plain — that bottleneck remains secure, and will for some time. 

OBSERVATIONS ON S. 1086 

Government has an essential role in making competition woric. And given the 
right ground rules, the benefits of competition should ultimately be within the reach 
of^every consumer. Your proposed legislation, S. 1086, "The Telecommunications In- 
frastructure Act of 1993, represents an important initial step in defining a policy 
framework for these changing and converging industries. 

Your bill embraces a number of key principles that are essential if America is to 
have the world's best telecommunications infrastructure. 

S. 1086 recognizes that the best telecommunications infrastructure is a competi- 
tive infrastructure and places maximum reliance on private investment to build out 
the infrastructure. In order to promote competition, your bill would begin to break 
down unnecessary regulatory barriers, particularly those that preclude entry in the 
local telephone exchange market. S. 1086 recognizes that equal access, number port- 
ability, and interconnection of networks on fair and reasonaole terms and conditions 
are a sine qua non to competitive entry. Your bill also calls for a review of state 
regulatory limits on competitive entry to ensure that they do not thwart procom- 
petitive federal policies. 

S. 1086 recognizes that competition in virtually all aspects of telecommunications 
is both inevitable and desirable. It also recognizes that government cannot merely 
declare the marketplace open and let Darwin's law prevail. We have not yet even 
reached the threshold of meaningful competitive entry in local exchange telephone 
service, the last remaining bottleneck in the terrestrial communications network. 
Federal policies that presume the existence of competition before it actually exists, 
and premise the elimination of restrictions on dominant local exchange carriers on 
that presumption, will have the perverse effect of killing off competition before it 
has even germinated. You must ensure that the policies you adopt, taken as a 
whole, provide a nurturing seedbed for emerging competitors. 

With that preface, let me address several of the salient elements of your proposed 
legislation. 

Competition in the local telephone exchange: We strongly support your goal of 
opening up the local telephone loop to competition. Every American will benefit from 
the new choice and innovation in local exchange services that only competitive entry 
can bring. But federal policy must ensure that this competition is real and sustain- 
able, not illusory. 

We applaud your commitment to remove federal, state and local barriers to entry 
in telephony and to promote interconnection and equal access to local exchange net- 
work functions and lacilities on a nondiscriminatory basis. Your overall policy direc- 
tion is on the right track, and a bill of this kind can help to ensure consistency and 



40 

uniformity in the opening up of local networks by the Regional Bell Operating Com- 
panies and other local exchange companies — which wiU be essential if competitive 
entry is to succeed. However, we hoi>e that any final legislation will provide more 
detail and guidance to the FCC and state regulators to ensure that Congressional 
intent is fufiy carried out. 

Telephone entry into the video programming delivery business: We recognize the 
inevitability, and even the desirability, from a public policy perspective, of ulti- 
mately permitting everyone to compete freely in the multichannel video delivery 
business as in every other aspect of the telecommunications business. As technology 
advances and competition emerges, the question is no longer "whether," but "when 
and under what circumstances." 

Your bill concedes that the dominant position of incumbent local exchange compa- 
nies requires that certain pro-competitive safeguards be imposed on their entry into 
the delivery of video services. Separate subsidiair requirements and proctions 
against inappropriate cross-subsidies are essential elements of any such legislation, 
and S. 1086 provides for some of these. We believe that the more specific safeguards 
contained in the bill that you introduced in the last Congress, Mr. Chairman — S. 
2112 — should be incorporated into S. 1086. Among other tmngs, that earlier bill es- 
tablished detailed separate subsidiary requirements and provided for stricter rules 
on cost allocation and treatment of intangible assets. 

In addition, we believe there is a critical threshold test that must be a part of 
any legislation: the requirement that the local exchange telephone maricet be found 
"effectively competitive as a precondition to phone company entry. 

Just last year Congress reimposed stiff regulation on the cable television industry, 
while at the same time taking steps to ensure that cable's multichannel competitors 
will flourish. Congress declared tnat much of its regulation of cable will be lifted 
when the multichannel maricetplace is subject to "effective competition," which Con- 
gress defined in relevant part as the availability of one or more alternative video 
providers to at least 50 percent of homes in a service area, and subscription to such 
alternative providers by at least 15 percent of all homes taking multichannel serv- 
ices. 

Today, in an ever-growing number of communities across America, consumers will 
soon have a real choice among multichannel video providers, including competing 
cable systems, wireless cable operators, and home satellite dishes. By the end oT 
1994, Hughes Space Communications will begin beaming 150 video chsinnels to 
small dishes at homes across America, and U.S. Satellite Broadcasting will also 
enter the market. 

In establishing these new restriction on cable. Congress did not presume that the 
multichannel video marketplace would be competitive by a date certain, or that by 
the mere enactment of legislation that marketplace could be deemed competitive — 
it insisted that the existence of real, effective competition be demonstrated before 
the incumbent cable operator would be deregulated. 

The telephone companies should be treated the same way. Any relief from the re- 
striction on telephone company provision of video programming services should be 
similarly conditioned on the existence of "effective competition" in the market cur- 
rently dominated by the local exchange companies. The narm you are trying to curb 
through regulatory safeguards and other requirements is to make it uneconomic for 
local exchange companies to shift costs, harming consumers and competitors. There- 
fore, the best safeguard of all is not to rely solely upon regulation, but to eliminate 
the local telephone company's economic incentive to shift costs by subjecting it to 
competition and ensuring that competition can be sustained. 

There is a fundamental linkage between letting local exchange companies into 
cable and promoting competition in the local exchange. The most likely providers 
of competitive local exchange services are today's local cable companies. Our compa- 
nies face immense barriers to entering that market, not the least of which is the 
resistance of many state regulators (fueled by the telephone companies) to grant op- 
erating certificates to new entrants, no matter how specialized the market they mav 
seek. The problems of interconnection, equal access, number portability, standard- 
setting, and others will likely take years to resolve through regulatory and judicial 
means. Letting the local exchange companies into the video business before their 
core business is subject to effective competition will simply wipe out economic incen- 
tives for competitive entry. 

Certainly, conditioning phone company entiy into cable merely on the existence 
of an FCC-approved interconnection tariff, as S. 1086 in its current form would do, 
is no guarantee that competitive entry will ever occur. On the contrary, freeing the 
local exchange company to invade the cable business from the moment that such 
tariff is approved means that the game will be over before it has begun. We have 
precedent tnat speaks clearly to the shortcomings of this approach — the FCC's ef- 



41 

forts to implement "open network architecture," or ONA, as a means of promoting 
competition in certain network and information services have been highly unsatis- 
factory. The local exchange companies cannot be held in check by the mere existence 
of an open-entry tariff. Congress must ensure that real and sustainable competition 
has taken hold in the local exchange before LEG entry into the video marketplace 
is allowed. This is a matter of fundamental fairness, for consumers and competitors 
alike. 

Universal service: Government must ensure that universal telephone service is 
preserved. This is a critically important social goal, but the way in which we achieve 
it must be reexamined. Regulations that maintain a monopoly network and allow 
cross-subsidies to promote access to that network are simply not a viable policy for 
the next century. Now is the time to explore new approaches. 

Your proposed legislation recognizes this fact by stressing that the states and the 
FGG "shall have as their goal directly assisting individuals or entities that cannot 
afford the cost of their telecommunications service or equipment." As government 
policy promotes competitive entry, the focus must shift away from intra-network 
cost-shifting and toward more targeted assistance to those who truly need it. 

We agree that all companies that participate in the local exchange marketplace — 
incumbents and new entrants alike, including cable operators — must bear some re- 
sponsibility to contribute to universal service. But the structure of the universal 
service program, and the flow of funds, must be changed. 

There currently are programs in place to ensure universal service which involve 
government-administered transfers from telecommunications users directly to local 
telephone companies. In the future, the better approach may be for government to 
give anyone who can demonstrate that they are the least-cost provider — whether the 
current local exchange company, a cable operator, an alternative access provider, a 
wireless operator — a chance to bid to become the "universal service provider." In 
other words, let anyone who can do the job, do the job. Another approach could be 
to allow competitive provision of universal service, and allocate these universal serv- 
ice funds to service providers in accordance with their share of the subsidized mar- 
ket; this could have the added advantage of expanding incentives for competitive 
entry into markets that would otherwise be economically unattractive. 

We encourage you to weigh these or other effective ways to accomplish the impor- 
tant social goal of universal service, and we are prepared to worii with you on this 
issue. 

Joint ventures, mergers and acquisitions by and between local exchange companies 
and cable systems: S. 1086 appears to bar joint ventures between local exchange 
companies and cable companies, or acquisitions of cable companies by local ex- 
change companies, without exception. We beUeve there must be flexibility in these 
provisions. In any market where competition is simply not sustainable, it would be 
extremely unfair and counterproductive to force one or both contenders to continue 
to provide service. And this may not simply be limited to rural markets. Therefore, 
any legislation should include appropriate policies to anticipate such circumstances 
and to permit mergers or acquisitions unaer requirements that ensure the public 
interest is protected, including the continued application of detailed pro-competitive 
and pro-consumer safeguards that would generally apply to their provision of multi- 
channel video services as we have detailed above. 

CONCLUSION 

Mr. Ghairman, you have shown your determination to adopt policies that wiU 
bring Americans a Twenty-First Century telecommunications infrastructure, second 
to none, and faster than the rest of the world. Given the right legal environment, 
America can have a choice among multiple wireline and wireless providers, offering 
competitive prices, innovative service options, and myriad combinations of capacity, 
capability and mobility that will meet our nation's diverse information and enter- 
tainment needs. 

But the ability of Comcast, other cable companies, and other telecommunications 
entrepreneurs to contribute to this infrastructure depends upon your unswerving de- 
termination to put competition first, to eliminate federal, state and local barriers to 
new entrants, and to promote compatibility and interconnection of networks. Equal- 
ly important, we hope you will avoid policies that permit local exchange companies 
to enter the multichannel video programming marketplace prematurely, or under 
regulatory safeguards that won't protect consumers or competitors against monopoly 
abuses. And we also encourage you to permit flexibility in joint ventures, mergers 
and acquisitions to account for the likelihood that not every community will be able 
to sustain competing broadband networks, in order to ensure that no community 
will be deprived of the best possible network. 



42 

On behalf of the members of NCTA, thank you again for the invitation to partici- 
pate in this vitally important dialogue. We are very eager to work with you to en- 
sure that our vision oi a competitive telecommunications future can become a re- 
ality. 

Thank you. 



["Cable Television and America's Telecommunications Infrastructure," and "Twen- 
ty First CentuiT Television — Cable Television in the Information Age," by the Na- 
tional Cable Television Association may be found in the committee's files.] 

Senator Inouye. Thank you very much, Mr. Roberts. Mr. Ware. 

STATEMENT OF LAWRENCE C. WARE, MANAGER, GARDEN 

VALLEY TELEPHONE CO. 

Mr. Ware. Good morning, Mr. Chairman and members of the 
subcommittee. My name is Lawrence Ware, and I am the manager 
of Garden Valley Telephone Co. in Erskine, MN. My company is a 
cooperative that serves approximately 13,000 subscribers in 24 ex- 
changes. Our density is 2.6 subscribers per mile of line. With the 
help of Federal and State programs, we provide single-party tele- 
phone service with 23 digital offices. We also have over 300 miles 
of fiber optic cable in service and provide a fully interactive tele- 
vision service connecting six area schools. 

I am appearing for the Rural Telephone Coalition to explain our 
grave concerns about S. 1086. The coalition is an alliance of NRTA, 
NTCA, and OPASTCO. The three associations represent more than 
850 small rural telephone systems. 

Mr. Chairman, we support universal affordable service and infra- 
structure development throughout the United States. We under- 
stand that is the purpose of S. 1086. However, the coalition be- 
lieves that S. 1086 is far more likely to raise rural rates, stall rural 
infrastructure improvements, and create new barriers to expanded 
service choices for most rural consumers. 

S. 1086 would preempt State authority and open local telephone 
service to competition. Economic theory generally says competition 
will increase efficiency, lower prices, and improve service, but rural 
systems typically serve thinly populated areas that support a single 
network only with the help of existing support structures. Indeed, 
small rural companies came into existence because marketplace 
forces chose not to serve high-cost, low-density areas. 

Encouraging duplication in rural areas is almost certain to erode 
our ability to provide high-quality service at affordable rates and 
upgrade our networks. Selective duplication and massive 
unbundling on request will erode the limited economies of scale 
available in low-density markets. Establishing competitive pricing 
for high-volume customers in rural areas will raise rates for resi- 
dential and small business customers. Add in the huge cost of local 
number portability, and you have a recipe for rural disaster. 

Now, I want to be clear. We are only asking you not to mandate 
rural competition. We ask that you continue to let regulators. State 
regulators, decide when the benefits of rural competition will out- 
weigh the costs. They understand the rural needs and are respon- 
sible to the local customers. 

The bill does contain some universal service and rural infrastruc- 
ture provisions, so it is clear that the subcommittee wants to help. 
In fact, the coalition agrees wholeheartedly with the provision re- 



43 

quiring universal service contributions from all carriers. The rest 
of the universal service and infrastructure provisions will not do 
the job. The bill deprives the States of most of their time-tested 
tools to aid and ensure universal service and then charges them 
with protecting universal service. 

Moreover, the bill endorses direct support flow to low-income 
users rather than support for high-cost areas, and it calls for cost- 
based rural rates. The existing support flows are efficient and they 
work well. The proof of that is in our affordable and world-class 
public switch network. However, provisions of this bill seem to con- 
flict with the existing support measures. We ask the subcommittee 
not to change the market structure for basic local service until you 
are sure that rural areas will have adequate support to prevent 
huge rate increases and a growing information gap between rural 
and urban areas. 

We need your help. Rural areas will need major investments to 
replacing aging plant, maintain adequate services, and bring need- 
ed information services to rural residents. The Coalition urges Con- 
gress to enact the provisions in S. 570 that require joint telco plan- 
ning and give small telcos the option to share network capabilities 
with their larger neighbors. Those policies will do much more for 
rural service, rates, and infrastructure development than S. 1086 
in its present form. 

Mr. Chairman, thank you for this opportunity to speak for the 
Rural Telephone Coalition. We look forward to working with the 
subcommittee to crajFt legislation that effectively promotes public 
network improvements without making rural consumers the vic- 
tims of a risky experiment with the national public switch network. 

Thank you, sir. 

[The prepared statement of Mr. Ware follows:] 

Prepared Statement of Lawrence C. Ware 

Gtood morning, Mr. Chairman and members of the subcommittee. My name is 
Lawrence C. Ware and I am the Manager of Garden Valley Telephone Company in 
Erskine, Minnesota. Garden Valley is an independent telephone cooperative that 
serves approximately 13,500 telephone subscribers in 24 exchanges spanning over 
3700 square miles in feight counties in northwest Minnesota. Our density is 2.6 sub- 
scribers per mile of line. We provide all one party telephone service with 23 digital 
central ofiices and have over 300 miles of fiber optic caole in service. Garden Valley 
provides a fully interactive television service connecting six area schools. We provide 
cable television service to approximately 2000 subscribers in eleven communities, 
and are also involved in providing cellular and paging services. Garden Valley has 
served rural Minnesota for 87 years. We are an REA borrower. 

I appreciate the opportunity to present the serious concerns of the Rural Tele- 
phone Coalition (RTC) with S. 1086, the Telecommunications Infrastructure Act of 
1993. 

The Rural Telephone Coalition is an alliance of the National Rural Telecom Asso- 
ciation (NRTA), National Telephone Cooperative Association (NTCA), and the Orga- 
nization for the Protection and Advancement of Small Telephone Companies 
(OPASTCO). More than 850 small and rural telephone systems scattered through 
46 states are members of the three associations. 

I. THE RURAL TELEPHONE COALmON SUPPORTS THE ULTIMATE POLICY GOALS OF S. 

1086, AS IT UNDERSTANDS THEM 

According to the findings and purposes of S. 1086, the ultimate goals of the biU 
are to develop the nation's telecommunications infrastructure; promote universal 
service; and provide consumers with advanced and reliable capabilities and services, 
reasonable prices, and a wide variety of service options. Mr. Chairman, the Rural 



44 

Telephone Coalition (RTC) strongly supports these ultimate goals of the bill.i They 
should be mandated ais federal policy goals for the FCC to pursue, not just identified 
as non-substantive purposes of the bill. Indeed, small and rural telephone compa- 
nies and existing rural telecommunications policies were created in order to realize 
in rural areas the exact results S. 1086 envisions. 

The RTC has long advocated the development of a nationwide advanced tele- 
communications infrastructure. Much has been written on this subject in recent 
years, which the RTC will not repeat in detail here. Telecommunications services 
play an important role in overcoming some of the problems associated with the long 
distances and isolation of rural life. For example, distance learning programs make 
it easier for rural communities to combine teaching and facilities resources, giving 
their students access to classes that the communities would not have been able to 
support individually. Similarly, medical imaging can allow physicians in small 
towns to tap into the consultation and diagnostic resources of larger urban hospitals 
without leaving their communities. Advanced services provided over state-of-the- art 
telecommunications facilities will allow more communities to benefit from these and 
other telecommunications services. 

The RTC has also always been fiilly committed to the federal and state universal 
telephone service policies. Small and rural telephone companies have striven to ex- 
tena service to those customers most at risk of maritetplace failure: low-income sub- 
scribers and subscribers located in areas that are more costly to serve. The RTC has 
also supported the various state and federal programs designed to help achieve and 
sustain the national goal of universal service, such as the Lifeline and Link -Up pro- 
grams, the Universal Service Fund and Rural Electrification Administration financ- 
ing. An important aspect of universal service is the availability of services at reason- 
able rates. The RTC believes that affordable local rates and nationwide averaged 
interstate toll rates are the hallmarks of an important and successful national pol- 
icy, which contributes to rural economic development by decreasing the difTerence 
between the cost of living and doing business in rural and urban areas. 

Small and rural telephone companies also see the benefit of maximizing consumer 
choices, of technology and services. Many rural LECs have deployed, or are planning 
to deploy, digital switching, fiber optic transmission, and signalling system 7 (SS7) 
in order to provide their rural customers with the same array of technolo©^ and 
service options that urban customers have. An advanced affordable network will 
allow multiple choices of information and other services to be available to rural resi- 
dents and businesses. The RTC believes that rural areas must keep pace with urban 
areas in development and affordability if rural areas are to succeed in their efforts 
at economic development. 

In the following testimony, the RTC will discuss (1) why rural areas have needed 
strong government policies and programs to achieve the telecommunications net- 
works that serve them well today at reasonable prices; (2) why competition will not 
provide affordable, hidi quality service; (3) why rural differences require the devel- 
opment of policies and mechanisms that will efiectively ensure universal rural serv- 
ice at reasonable rates and rural infrastructure developments Congress before 
makes radical changes in the nation's telecommunications maritet structure and (4) 
some policy initiatives that will serve rural customer interests better than those pro- 
posed in S. 1086. 

II. FEDERAL POUCIES AND MECHANISMS, NOT THE MARKETPLACE, HAVE BROUGHT HIGH 
QUALITY TELECOMMUNICATIONS SERVICE TO RURAL CONSUMERS 

A. Rural LECs Grew Up to Serve Unserved Areas 

Small and rural independent telephone companies have a long history of serving 
those areas that the Bell companies did not choose to serve. But the marketplace 
alone did not bring about today's ubiauitous, aflbrdable telephone network. 

Commercial telephone service in the United States began in 1877. Initially the 
Bell companies held the necessary patents and essentially enjoyed a complete mo- 
nopoly. However, spurred only by the marketplace, the Bell companies did not ex- 
tend service to many rural and residential areas. Consequently, after 15 years of 
Bell infrastructure development, there was only approximately one telephone for 
every 240 people in the United States. 

Independent telephone companies began to appear to meet the unmet need in 
their conmiunities in 1894 when the essential Bell patents had either expired or 
were narrowly construed by the courts. In addition, competition by independent 



iWe discuss, in Section III, our concern that the means chosen to achieve these laudable goals 
will not do so for rural areas and, in Section IV, the measures we believe will better serve rural 
consumers. 



45 

local exchange carriers (LECs) appeared in only the most profitable locations. Less 
populous areas were generally served by systems under cooperative ownerships, or 
by often rudimentary farmers lines," if they were served at aU. 

Telephone service was necessary for those living in the rural and remote areas. 
Moreover, it allowed them to communicate quickly without the necessity of an ex- 
pensive and time-consuming trip. In fact, rural residents still tend to rely heavily 
on telecommunications because of their isolation in comparison with metropolitan 
area residents.2 

B. Rural LECs Have Shown a Commitment to Rural Infrastructure Development 
The pioneering spirit of the owners of the cooperatives and those who strung the 

"farmers lines" began the process that brought service to rural and remote America. 
Small and rural telephone companies have continued to upgrade their networks and 
bring new services and technologies to their customers, often at a faster pace than 
the larger companies. The National Exchange Carrier Association (NECA) compUed 
a report regarding the technological standing of the more than 1000 small telephone 
companies electing to participate in the NECA interstate access service tariff. These 
companies serve many of the rural and remote areas of the U.S. Over 90 percent 
of these companies serve less than 10,000 access lines — 82 percent of these small 
companies have fewer than 6500 access lines. On an average they serve about 5600 
access lines per company. By the end of 1992, 93 percent of their central office 
switches were expected to be digital. By the end of 1990, NECA companies had in- 
creased their digital switches to 76 percent of their total switches. This compares 
to 59 percent for the RBOCs. These NECA member companies continue to be lead- 
ers in the deployment of digital switches. 

More than 800 of these companies' central offices, serving over a million access 
lines, will be upgraded to new software programs by the end of this year. Approxi- 
mately 35 percent of these companies have installed some fiber optic interofUce fa- 
cilities. Ten percent of the offices will have at least some fiber in tneir loop facilities 
by year-end 1994. 

C. Rural LECs Have Relied on Government Programs and LEC Network Integration 

to Promote High Quality, Affordable Service 

Independent LECs have been a critical factor in the equation that makes avail- 
able "so far as possible, to all the people of the United States a rapid, efficient, na- 
tion-wide, and world-wide wire and radio communication service with adequate fa- 
cilities at reasonable charges. But rural LECs could not have done it ^one." The 
other factors in the eouation necessary to achieve universal service and infrastruc- 
ture development are lederal and state support programs. 

'Die Rural Electrification Administration (REA) telephone loan program has been 
instrumental in ensuring that modem telecommunications technology and services 
are available in rural areas in the United States. Since the inception of the tele- 
phone lending program in 1949, REA financing has provided telephone service to 
more than 5 million subscribers. REA borrowers have grown from less than 20 to 
960 since the program began. All of the REA telephone loan funds have been used 
to further the purpose of the law — "to furnish and improve telecommunications serv- 
ices in rural areas." This federal program has been indispensable in ensuring that 
the nation's universal service objectives are met. Indeed, the statutory purpose is 
to provide and improve service for "the widest practicable number of rural users 
* * *"3 The REA plays a pivotal role in the development of the infrastructure in 
rural areas. Moreover, the continued efficient operation of the Rural Telephone 
Bank and the REA loan programs is essential to the continued development of the 
telecommunications infrastructure in the rural areas of the United States. 

The Universal Service Fund (USF) is a Federal/State program which helps offset 
the hi^ operating costs of some telephone companies, enabling them to keep local 
rates at reasonable levels in high cost areas — most oflen rural and remote areas. 
Since the establishment of the USF, many of the small and rural LECs have ex- 
tended service to remote areas and upgraded their facilities without significant im- 
pacts on their customers' local rates. Thus, the USF significantly contributes to uni- 
versal service and infrastructure development. 

The federal commitment to geographic averaging of interstate toll rates is an es- 
sential component of tne Federal Communications Commission's (FCC's) universal 
ser/ice policy. Through interstate averaging, price reductions for high volume routes 
also benefit customers making calls on low volume routes (mostly to or from rural 



2 Rural America in the Information Age, Edwin Parker, Heather Hudson, Don A. Dillman, An- 
drew Roscoe, p. 34 (1989). (Parker). 
3 7U.S.C.. Sec. 721. 



46 

and remote areas). Geographically averaged toll rates are very important to cus- 
tomers in rural areas. Rural residents use telecommunications more and spend more 
of their disposable income on telephone calls than their urban counterparts. For ex- 
ample, Native people in northern Canada and Alaska spend more than three times 
as much as their urban counterparts on long-distance calls, even though their aver- 
age income is generally lower.'* 

Members of the rural community make many more long distance calls because of 
their location. For instance, a rural resident's call to a physician is likely to be a 
long distance call because of the limited geographic scope of the local service in 
these remote and rural areas and the relative lack of doctors. Consequently, without 
geographic rate averaging, people in some rural communities would pay substan- 
tially more for calls that metropolitan area residents take for granted, since they 
are within the scope of a "local call." Higher rates would particularly disadvantage 
those on fixed incomes and most in need of communications services, such as the 
elderly. High cost access to information services in rural areas could stunt economic 
development and deprive consumers of the benefits of information sources available 
at reasonable prices in cities and suburbs. Geographic rate averaging thus remains 
essential to universal service and infrastructure development. Losing the benefit of 
nationwide toll rate averaging would increase the economic disadvantages and isola- 
tion of rural and remote areas. 

The local franchise has provided a successful vehicle to achieve the nation's para- 
mount public interest goal — universal, affordable, eflicient, high quality communica- 
tions service. In fact, the local franchise was developed specifically because it could 
satisfy public objectives where competition failed.^ The franchise allows each state 
to promote efficiency, service to remote areas, and aflbrdable local and long distance 
services by viable L£Cs. 

Regulators concluded that competition interfered with economies of scale because 
of the large investment required to develop and maintain telephone operations and 
the high levels of fixed costs. Concern with the importance of telephone service and 
the belief that it was a natural monopoly, most efTiciently provided by a single com- 
pany in a geographical area, led state legislators in a growing number of states to 
apply "public utility" regulation to telephone communications as industries "affected 
with the public interest." 

The local franchise concept has worked, in part, because it gives each state lati- 
tude to tailor regulation to satisfy public goals to conditions within the jurisdiction. 
State jurisdiction over local exchange service produces a package of rights and obli- 
gations fine-tuned by each state to obtain the desired public benefits. The develop- 
ment of universal service and the advanced infrastructure has been substantially 
helped by the co-provision of services by small and large LECs. LEC-to-LEC inter- 
connection and joint service arrangements increase small LEG efficiency, in spite of 
the inherent limitations on economies of scale in low density rural markets. This 
traditional form of infrastructure sharing has allowed the small LECs to establish 
interconnection arrangements with their larger Bell neighbors that afford them a 
greater opportunity to bring new and advanced services to their customers in rural 
and remote areas. Such co-provision of services establishes a publicly available core 
distribution network that serves as a foundation for the advanced services and infor- 
mation opportunities that are becoming available. 

Thus, one indispensable ingredient that has allowed LECs to provide rural resi- 
dents and businesses with high quality, affordable telecommunications and techno- 
logically advancing network capabilities has been the federal and state programs 
aimed at serving high cost rural areas. Preserving the hard-won benefits of these 
programs must be the backdrop for this Subcommittee's consideration of a new pub- 
lic policy framework. These programs — the REA telephone loan programs, the Uni- 
versal Service Fund, geographic toll rate averaging, the local franchise and LEG 
public network integration — and the service orientation of the small and rural LECs 
combine to drive the development of the rural infrastructure and help meet the na- 
tion's universal service objectives. 



■•Parker, Supra. 2 p. 34. 

BSee, W.G. Lavey, The Public Policies Which Changed the Telephone Industry Into Regvilated 
Monopolies: Lessons from Around 1915 (1987). 



47 

III. ENACTING S. 1086 IN ITS PRESENT FORM, WOULD UNDERMINE UNIVERSAL SERVICE, 
INFRASTRUCTURE DEVELOPMENT AND REASONABLY PRICED CONSUMER CHOICES FOR 
RURAL AMERICANS 

A. Preemptively Mandating Competition Cannot Be Assumed To Benefit Rural Con- 
sumers. 

Mr. Chairman, the RTC recognizes the good intentions underlying S. 1086. How- 
ever, the RTC is concerned that the bill's conibination of regulatory and marketplace 
tools will not achieve the legislation's goals in rural areas. 

A basic premise of S. 1086 (p. 2, H. 18-22) is that fostering competition will 
encourage infrastructure development and have beneficial effects on the price, 
universal availability, variety, and quality of telecommunications services. 
Based on this belief, S. 1086 proposes neavy reliance on competition and market- 
place forces to achieve the paramount national telecommunications goals of univer- 
sal service, infrastructure aevelopment and increasing consumer choice. To stimu- 
late competitive entry, S. 1086 imposes extensive interconnection and unbundling 
obligations unparalleled in competitive industries. 

This proposed national policy would initiate a large-scale test of telecommuni- 
cations economics: Alfred Kahn, a strong advocate of competition, has testified in 
the House of Representatives that only experimentation can demonstrate whether 
local exchange operations are a natural monopoly s; another noted economist, Lewis 
Perl, has testified that the feasibility and impact of intraLATA competition can also 
only be determined by experimentation.^ 

liie RTC cannot comment on how this proposed experiment in revolutionizing the 
nation's local exchange and access market structure and intercarrier obligations will 
affect metropolitan markets. It may be time to experiment with local and intraLATA 
competition in metropolitan areas. That judgment call is for Congress, after it has 
identified and dealt with the likely side effects discussed below. However, the risk 
of such an experiment in rural areas is not one that members of Congress should 
impose on the residents of these high cost, economically fragile portions of the na- 
tion. 

Northwestern University Economics Professor John C. Panzar has warned that 
local and intraLATA competition in rural areas can decrease efficiency and erode 
the support flows underlying economically and socially desirable universal service.^ 
Moreover, small and rural LECs have long experience in serving areas with lower 
population density and consequently higher costs of service per customer. They un- 
derstand, as the National Telecommunications and Information Administration 
(NTIA) recognized in NTIA Telecom 2000, the pressing need to: 

assess each competitive policy as to its potential to be counterproductive in 
sparsely populated areas where the economic base may not be sumcient to sup- 
port a single firm, much less competing firms. » 

S. 1086 does not follow this principle of cautiously assessing the feasibility and 
effects before mandating competition in rural areas. Instead, the policy in S. 1086 
would encourage new entrants to build duplicate facilities in competition with estab- 
lished rural universal service providers to take advantage of any perceived oppor- 
tunity for profit. The consequences for rural consumers and the LECs that serve as 
rural carriers of last resort could be devastating. 

1. The Costs of Rural Competition Will Likely Exceed the Benefits 

To the extent that competitors come to rural areas at all, the costs often will ex- 
ceed any local benefits. The generally low volume of traffic in rural areas already 
makes it difficult to achieve economies of scale in trunking, switching and other net- 
work functions. Long local loops further add to the cost to serve rural customers. 
Duplication of selected parts of the network by competitors would reduce traffic 
loadings, further diminishing efficiency. 

New entrants seldom serve the places and customers that are most costly and dif- 
ficult to serve; they choose to compete for high volume, low cost customers and 
places. The higher cost customers and places are left behind for the legally obligated 
"carrier of last resort" to serve. Thus, the existing provider becomes saddled with 
more costs to recover from a diminishing customer base. 



^Testimony of Alfred E. Kahn before the House Subcommittee on Telecommunications, p. 5 
(July 15, 1987). 

''Testimony of Lewis J. Perl before the Kentucky Public Service Commission, pp. 3-4 (Septem- 
ber 8,1989). 

8 J.C. Panzar, The Continuing Role for Franchise Monopoly in Rural Telephony (1987). 

8 U.S. Department of Commerce, (NTIA) NTIA Telecom 2000: Charting the Course for a New 
Century, p. 97 (1988) (NTIA Telecom 2000). 



48 

Cost and rate averaging between lower cost areas and customers and higher cost 
areas and customers is increasingly unsustainable for a rural LEG faced with com- 
petition. Great Plains Gommunications in Nebraska has stated that it costs 10 times 
more to serve the outlying parts of its service area than to serve a core rural com- 
munity. Deaveraging at any level means higher rates for the customers it costs 
more to serve. 

There is little incentive for the universal service provider to upgrade the publicly 
available network infrastructure when cost recovery is in doubt. Accordingly, to the 
extent that the bill encourages rural duplications the result is likely to oe higher 
rates and less network modernization for typical rural residential and small busi- 
ness customers. The benefits to larger business customers and other "winners" from 
imposing a federal local exchange and intrastate competition policy will be paid for 
by the rural and small business "losers." These ill-fated consumers will also likely 
form a growing rural class of information have-nots, as their infrastructure falls be- 
hind, fulfilling the Office of Technology Assessment's warning of an increasing rural- 
urban infrastructure gap.io 

2. Many Rural Consumers Are Unlikely to Have Reasonably Priced Choices 

Among Providers 

Rural areas are not immune from competition. Rural cellular systems are in oper- 
ation providing service at premium prices, and PGS systems will be authorized be- 
fore long. The dense cores of many rural areas have cable service, although the sys- 
tem often does not "pass" residents in the surrounding areas. But it is a serious mis- 
take to assume that marketplace forces wiU offer the typical rural residential or 
small business customer competitive choices and access to advanced networic capa- 
bilities, or even maintain reasonably priced basic services and expand access to new 
services. Entrants concentrate on high volume customers with the highest potential 
profit margin. Lower volume customers are then left with only one choice of pro- 
vider, but almost certainly must pay higher rates. Indeed, typical rural consumers 
would have more competitive service choices if the LEG that provides universal 
service could count on recouping the cost of widely-available advanced public net- 
work capabilities. Affordable alternative services could then be offered using the 
public network. 

3. Far-Reaching Requirements for Interconnection, Number Portability and 

Intercarrier Arrangements Will Overburden Rural Areas 

Rural consumers that experience no benefits would nevertheless shoulder a share 
of the expense for S. 1086's policies to foster competition. Local number portability 
and selective, minutely unbundled interconnection, both required upon request 
wherever "technically feasible" under S. 1086, could impose enormous costs and ad- 
ministrative burdens on the universal service providers. For example, even small 
LECs would require extensive data bases and signaling capabilities to accommodate 
floating local numbers, even if few customers have access to alternative providers. 
Unbundling would be available in rural networks, on request, without regard to the 
effect on the loading and efficiency of existing or planned facilities, the different eco- 
nomic consequences for low volume rural markets or the extent of demand for 
unbundled networic elements. 

The FGG has limited its expanded interconnection requirements for interstate 
special access — and those proposed for switched access - to the largest Tier 1 LEGs. 
This biU goes far beyond the expert federal agency's carefully considered application 
to sweep in small and rural LEGs, without any analysis of their different cir- 
cumstances. 

S. 1086 Could Interfere with Efficient Network Development and Integration 
Mechanisms 

Rural Electrification Administration (REA) programs that provide capital to im- 
prove the infrastructure in rural areas are unavailable where duplicative rural tele- 
communications facilities may be involved. To protect the U.S. government's loan se- 
curity, the Rural Electrification Act restricts loans to situations where a state com- 
mission issues a certificate of convenience or the Administrator makes an equivalent 
ruling that "no duplication of lines, facilities or systems, providing reasonably ade- 
quate services will result therefrom." 7 U.S.G. §922. By preempting state certifi- 
cation and making duplicative entry a national policy, the bill may obstruct needed 
loans for rural infrastructure development and compromise the security of existing 
REA loans. It would be ironic if legislation purporting to stimulate infrastructure 



10 U.S. Congress, Office of Technology Assessment, Rural America at the Crossroads: 
Networking for the Future, p. 79 (1991). 



49 

development instead interfered with the highly efFective REA rural infrastructure 
development programs. 

In fact, S. 1086 could also limit the ability of rural LECs to buy rural cable tele- 
vision systems or engage in joint ventures to increase the efficiency of the rural in- 
frastructure. Congress allowed the acquisition of rural cable systems in the 1984 
cable legislation and left the definition of "rural" up to the FCC. However, S. 1086 
(pp. 17-19) would amend the 1984 Cable Act cross-ownership provision to limit LEC 
acquisitions and most joint arrangements to cable television systems within "rural" 
service areas as currently defined. The FCC has before it compelling evidence that 
the definition of rural areas should be expanded to remedy gaps in rural cable tele- 
vision availability. In rural areas, the ability to integrate telephone and cable oper- 
ations could spell the difference between broadband telecommunications availability 
and arrested network development. Thus, there is no reason to change the 1984 
rural acquisition policy or restrict the FCC's discretion to define "rural" for purposes 
of the rural exemption. 

The interconnection and mutual compensation sections might even be interpreted 
to require termination of the long-established co-provider relationships among 
LECs. In that case, rural and residential customers could suffer further setbacks in 
the price and availability of services and network capabilities. n 

5. Changes in the Interexchange Provisions of the MFJ Must Also Be Care- 

fully Evaluated 

S. 1086 also proposes major changes in the interexchange restrictions currently 
applicable to the Regional BeU Operating Companies under the Modification of 
Final Judgment that implemented AT&T's divestiture of its local exchange and ac- 
cess operations in the government's antitrust case. 12 The RTC has generally opposed 
removal of the interexchange restrictions, except for narrowly limited relief to rec- 
tify specific problems. 

The interexchange relief proposed here includes an oddly-assorted menu of 
changes. The proposal to remove the restriction with regard to cable television oper- 
ations presents new questions which the RTC is still studying. The requirement of 
equal access for cellular systems would inexplicably extend a requirement now ap- 
plied to the RBOCs to the rest of the cellular industry, with no recognition of the 
significant differences involved. The other cellular relief seems to diiplicate relief al- 
ready granted through court-approved waivers. In contrast, the RTC has supported 
relief to allow interLEC signmling needed for network operations. This beneficial 
and necessary change is not proposed by S. 1086. 

Clearly, the smorgasbord of interexchange relief oroposed here must be evaluated 
carefully. One criterion for all such proposals snould be protecting adequately 
against further geographic deaveraging of interstate toll rates. 

6. Limiting the New National Policy Mandate and Requirements to Metropoli- 

tan Areas or Large LECs Would Provide Partial Relief for Rural Areas 
Many of the problems raised for rural areas by S. 1086 could be alleviated by re- 
stricting the bill's competitive mandate and implementing requirements to metro- 
politan areas or (as the FCC has done for special access interconnection) to the larg- 
est (Tier 1) LECs. 

This approach would not preclude competition in rural areas. It would simply 
leave the authority to make determinations about rural competition where it is 
today, with the States. States would remain free to allow competition whenever they 
decide that the benefits of competition in rural areas outweigh the costs. A Tier 1 
limitation would allow competition with the LECs serving most of the nation's cus- 
tomers. Tier 1 carriers serve more than 92 percent of the nation's access lines. Even 
excluding the large LECs' rural areas would leave the majority of U.S. telecommuni- 
cations customers within the local competition experiment. Thus, a more cautious 
policy that recognized rural differences would still represent a massive change in 
national telecommunications policy, while decreasing the unacceptably high risKs S. 
1086 poses for rural consumers. 

B. S. 1086 Undermines Crucial Universal Support Mechanisms and Jeopardizes 
Toll Rate Averaging 
Mr. Chairman, S. 1086 recognizes (P. 4, LL 21-24) that "additional regulatory 
measures are needed to allow consumers in rural markets and non-competitive mar- 
kets the opportunity to benefit from high-quality telecommunications capabilities." 



11 Section IV, below, discusses the vital importance of infrastructure sharing to rural infra- 
stmctuT^ fldvflnc68. 

^UniUd States v. Western Electric Civil Action No. 82-1092 (U.S. District Court, District of 
Columbia). 



50 

The bill even seeks, in Sections 229(d) and 230, to address the inherent problem of 
maintaining universal service and promoting infrastructure development tnroughout 
the U.S. in a competitive environment. The RTC appreciates the efTort to accommo- 
date rural needs. 

Unfortunately, the curative efforts are vague and uncertain. They boil down to 
empty assurances. Thus, even if S. 1086 is amended to limit its pro-competitive 
mandates to metropolitan areas or Tier 1 LECs' service areas, further changes are 
necessary to protect universal service, promote rural infrastructure advances and 
keep rates reasonable for rural and residential consumers. 

1. Competition (Without New Mechanisms) Is Incompatible with Toll Rate 

Averaging and Existing Support Flows 

Economic theory holds that competition will bring prices down to incremental 
cost. Competition in metropolitan areas is already creating pressure to lower urban 
and large customer rates that are above LECs' costs, to permit deaveraging and to 
reduce or eliminate support flows, whether direct or achieved through public policy- 
driven cost allocations. These have been the traditional sources of support flows to 
keep the rates in hi^er cost areas and rates for low volume customers lower than 
they would otherwise be. The same kind of cost allocation and pricing policies have 
traditionally kept business rates above their average costs so that residential rates 
could be kept low and have supported interstate toll rate averaging. 

Competition will inevitably eviscerate support mechanisms that require some 
competitors (i.e., LECs) to charge above-cost rates for service subject to competition, 
while new entrants can charge lower, cost-based rates and do not bear equivalent 
regulatory costs and burdens. Section 229(dXl) proposes a major step in the right 
direction by requiring all competitors to contribute to universal service. The RTC 
supports requiring contribution for universal service from all providers of commu- 
nications service. The contribution scheme should recognize that LECs already con- 
tribute significantly by actually providing service to all in their service areas upon 
reasonable demand, and serving as the de facto backup carrier for other providers 
and as the carrier of last resort. They should receive "credit" in any contribution 
mechanisms for continuing to perform these duties from the era of public utility reg- 
ulation. 

2. S. 1086 Gives States the Responsibility but not the Means to Protect Univer- 

sal Service and Averaged Toll Rates 

The bill places upon the States the primary responsibility for "ensur[ing] the pres- 
ervation and advancement of universal service," (§ 229(d)(2)) and encourages them 
to use "regulatory incentives" or, failing that, unspecified "other methods" to provide 
high quality facilities and capabilities to rural and non-competitive areas, if the 
states do not successfully ensure rural infrastructure and service advances, the FCC 
"may take any action necessary to achieve that goal." Of course, neither the States 
nor the FCC would be free to adopt universal service or infrastructure development 
approaches unless they were consistent with S. 1086. 

Despite their greater familiarity with rural conditions and their greater account- 
ability to their constituents. State regulators have been preempted from their tradi- 
tional full authority over local and intrastate entry, interconnection and even rates. 
For example, the 'local franchise" package of public utility rights and responsibil- 
ities — long a valued tool in achieving universal service i3 — would become unlawful 
a year after enactment of S. 1086. 

To illustrate further, section 23(Xa) requires that "consumers in rural and non- 
competitive markets" have network capabilities and facilities at "nondiscriminatory 
rates that are based on reasonably identifiable costs of providing such services." 
Local rates and access charges based on the "reasonably identifiable costs" of serv- 
ing low-density rural and non-competitive areas will be higher than the averaged 
rates available under existing support mechanisms. The FCC has already allowed 
Tier 1 LECs to begin the process of deaveraging their access charges into density- 
based zones to meet special access competition. Such access deaveraging increases 
the pressure to deaverage interstate toll rates, raising rates for service on low den- 
sity routes. S. 1086 thus seems to embrace the concept of higher rates for rural or 
remote communities in Alaska, Hawaii, Montana and other distant or sparsely pop- 
ulated states as the price of competitive policies that will help big businesses and 
high volume urban customers. i* 



13 See Panzar, supra, n. 3. 

i<The requirement of rates based on "reasonably identifiable costs" of rural service might 
even be used to abolish traditional support through public policy-driven cost allocations. 



51 

3. The Bill's Universal Service Proposal Conflicts With Existing Support 

Mechanisms 
By settling the responsibility for universal service on the states, aided solely by 
FCC "coordmation," S. 1086 seems to undermine support flows that cross state 
lines. Beyond that, it is even more difficult to see how nationwide toll rate averaging 
and support for hi^ cost areas can survive the enactment of this bill: S. 1086 states 
the national policy goal of support that "directly assist[s] individuals or entities that 
cannot afibra the cost of their teleconmiunications service or equipment." (Section 
229(dX3)). If the intent is to retain existing support to protect against rate increases 
and greater disparities, amendments are necessary. 

4. S. 1086 Also Fails to Resolve the Inherent Conflict Between Rural Infra- 

structure Development and Marketplace Reliance 
S. 1086 also delegates to the States the primary responsibility for rural infrastruc- 
ture development. Here, too, preemption of the States' current authority over mar- 
ket structure, interconnection and at least some elements of rate-making and 
intercarrier compensation arrangements raises serious questions about States abil- 
ity to assure infrastructure development. Under the mutual compensation reauire- 
ment, can the states continue to require large LECs to share infrastructure ana pro- 
vide joint-through service with smaller LECs? What "regulatory incentives" are 
available if selective cream-skimming is encouraged, rural rates must be cost-based 
and support flows are, at best, extremely uncertain and limited to low income assist- 
ance? Low income individuals may not even use their direct assistance to connect 
to the universal service provider's network. The same questions would be pertinent 
if the FCC tried to rectijy marketplace failure in rural infrastructure development 
under the default provision of Section 230(a). 

5. The Rural Rates and Infrastructure Dilemma Must Be Resolved Before 

Local and Intrastate Competition Are Unleashed 
Rural infrastructure development is a real and immediate need. Analysis of S. 
1086 makes it clear that the oill lacks adequate universal service and rural infra- 
structure development safeguards; and real competition must inevitably erode the 
current mechanisms that unfairly disadvantage incumbent universal service provid- 
ers. Thus, this Subcommittee should again show the keen sensitivity to the needs 
of rural consumers it has demonstrated in the past: Before moving forward on a pro- 
posal to preempt the States and mandate a nationwide comoetitive market struc- 
ture for local and intrastate services, the Subcommittee should find effective, com- 
petitively-neutral support mechanisms that can be sustained in a competitive envi- 
ronment. 

IV. CONGRESS SHOULD ENACT POLICY MANDATES AND LEG INFRASTRUCTURE SHARING 
AND JOINT PLANNING LEGISLATION TO ATTAIN THE GOALS OF INFRASTRUCTURE DE- 
VELOPMENT AND UNIVERSAL SERVICE 

The RTC cannot yet suggest a comprehensive package of safeguards and 

universal service mechanisms that will enable Congress to mandate local and 
intrastate competition without endangering universal service and rural infrastruc- 
ture development or threatening rural residents and businesses with skyrocketing 
rates. However, the RTC believes that some modest measures are necessary to pro- 
tect and develop the national universal service network while Congress develops the 
solutions it needs before drastically changing the nation's telecommunications 
ground rules. 

The RTC has for the last several years advocated legislation that would greatly 
assist small and rural LECs and their subscribers in obtaining the benefits oT a na- 
tionwide, reasonably priced infrastructure. We believe that to meet the goals of in- 
frastructure development, universal service and consumer choice, Congress should 
reaffirm that national telecommunications policy includes nationwide access to in- 
formation services via an advanced public network infrastructure. Congress should 
also provide for joint planning and infrastructure sharing by the nation's LECs 
which together provide the nation's core public distribution network. The RTC sup- 
ports the approach taken in S. 570 to ensure the continued development of the na- 
tion's public switched network. Specifically, we believe that S. 570 s provisions per- 
taining to joint LEC planning and infrastructure sharing are essential to the avail- 
ability of new technologies and services in the rural U.S. 

Before its breakup, AT&T served as the telephone service network manager and 
standards setter for the public switched network. When AT&T was divested of its 
local exchange companies, a void was created. At present, the nation's local tele- 
phone companies participate on a voluntary basis in some aspects of network plan- 
ning. However, there is no comprehensive or formal policy or mechanism which cov- 



52 

ers all aspects of network management and planning needed to ensure the contin- 
ued interconnectivity and interoperability of the LEG public switched network. Nor 
is there any policy or mechanism in place to ensure that new services and tech- 
nologies reach the rural areas of our nation. As competition develops, preserving the 
national public network as a univereally available resource will become more dif- 
ficult, but no less important. 

As a result of the AT&T divestiture and the ensuing deregulatory trend in tele- 
communications policymaking, the public switched network has become increasingly 
fragmented. Prior to the breajcup, expanded technological capabilities and services 
were traditionally spread throughout the nation's local exchange service areas by 
aggregated pricing and cost sharing mechanisms. This process is jeopardized when 
an unrestricted marketplace drives prices to costs on low cost parts of the network, 
the heavily populated urban areas. LECs serving metropolitan areas become in- 
creasingly unwilling to share with their rural neighbors. Rural America needs help 
in dealing with the effects of policies implemented primarily for a competitive urban 
environment. 

The fragmentation of the predivestiture nationwide partnership has made an inte- 
grated network more difficult to achieve by fundamentally changing the relation- 
ships among carriers. For example, if 557 had been a truly joint efibrt, with all the 
participants' technical needs and financial situations taken into consideration, the 
RTC believes that independent LECs probably could have participated more fully 
and cost-effectively in this technology. As it turned out, independent telephone sys- 
tems had to play a fast game of catch-up in order to bring this signaling technology 
and the services it supports to their subscribers. Thus, there must be affirmative 
pubUc policy requirements and safeguards to ensure that the largest telephone sys- 
tems woric with other telephone systems to develop a nationwide advanced public 
communications infrastructure. Congress should not leave the nation's communica- 
tions network to be shaped by large business needs and the largest LECs' percep- 
tions of the marketplace. 

Mr. Chairman, communications and information will play a major role in the life 
of this country and its citizens. The benefits of telecommunications and access infor- 
mation should not be limited to our cities. In fact, the availability of modem tele- 
communications networks in rural areas is the key to revitalizing rural America. 

Along with joint planning requirements, small and rural LECs need infrastruc- 
ture-sharing in order to provide new services and technologies to their subscribers. 
Through infrastructure sharing, small and rural LECs would be able to share infor- 
mation and technology with larger telephone companies, making it far more eco- 
nomical to offer a fuIT array of advanced telecommunications services to their cus- 
tomers. 

To participate in the Information Age small and rural LECs must be able to 
choose the most economical way to install or obtain access to the complex and ex- 
pensive infrastructure required to deliver new services. They should be able to work 
with larger LECs until it becomes cost effective to install their own network capa- 
bilities. Joint network planning and infrastructure sharing policies would give 
smaller LECs the ability to upgrade their networks sooner. Tnese sharing arrange- 
ments are also key to maintaining a fully functional nationwide public telephone 
network. 

Infrastructure sharing is not a new concept. For example, some small LECs use 
a larger LECs tandem switch to deliver tramc to interexchange carriers. However, 
as new network technologies are introduced and competition develops, it is essential 
for public policy to ensure that necessary infrastructure sharing continues to protect 
customers in areas where competitive choices will become available slowly, if ever. 
It is not economically feasible to install vast databases and advanced switching 
equipment in some rural areas. This does not mean, however, that rural commu- 
nities must go without advanced services. Using fiber optics and other transmission 
media, LECs serving rural areas can access the databases and advanced switches 
that larger LECs install in more populous areas. 

Infrastructure sharing is a vital ingredient for the infrastructure development 
goal. Public policy requiring infrastructure sharing at the request of small LECs 
would help ensure that all Americans, urban and rural alike, would have access to 
a nationwide information network. 

Mandating planning and infrastructure sharing by neighboring LECs that collec- 
tively make up the only nationwide regulated network which provides universal 
service, is different from requiring sharing among regulated LECs and their largely 
unregulated competitors, which serve only the locations and customers they choose. 
Treating carriers with difTerent obligations and motives as if they are the same is 
just as unreasonable as treating identical carriers differently. 



53 

To attain the goal of infrastructure development and nationwide access to new 
services, Congress should adopt a national telecommunications policy statement 
that promotes an integrated nationwide LEG network, joint LEG network planning 
and LEG infrastructure sharing. 

V. CONCLUSION 

The RTG has long stated that Gongress should set national telecommunications 
policy to promote universal service and nationwide enhancement of the public tele- 
communications network. Legislation, if it is to protect the interest of rural America, 
must accommodate the major differences in cost of service and conditions that 
confront rural providers of universal service. 

Gongress cannot assume that the marketplace will suffice to protect rural aretis. 
Different policies and specific, effective, sustainable support mechanisms must be 
developed to prevent high rural rates, a second class rural network and new bar- 
riers to expanded rural service choices. 

As S. 1086 is currently drafted, it would jeopardize rural service rates and infra- 
structure development. The RTG looks forward to working with the Subcommittee 
to craft legislation that will meet the needs of America's rural areas. 

Senator INOUYE. Thank you very much, Mr. Ware. You may be 
assured that this subcommittee will be working with you. As you 
can look at the subcommittee, they represent rural America. May 
I now call on Mr. Coe. 

STATEMENT OF KERMTT COE, DIRECTOR OF MERCHANT 
ACCEPTANCE STRATEGY, VISA INTERNATIONAL 

Mr. CoE. Mr. Chairman and distinguished members of the com- 
mittee on communications, my name is Kermit Coe and I am a di- 
rector with the VisaNet Market Development Group of VISA Inter- 
national, and I am pleased to have this opportunity to testify in 
support of S. 1086, the Telecommunications and Infrastructure Act 
of 1993. 

VISA International is an association of over 21,000 financial in- 
stitutions throughout the world that are licensed to use its service 
marks in connection with payment systems, notably credit and 
debit cards; check authorizations; automated teller machines; and 
related services. VISA is the world's most widely used and accepted 
credit card. The approximately 300 million VISA cards now in cir- 
culation are accepted by 10 million merchants around the world. 
Last year alone, nearly 6 billion transactions were completed using 
a VISA card. 

Communications is the lifeblood of VISA. It has been said that 
modern banking consists largely of computers talking to each other 
over telephone lines about money, and nowhere is that more true 
than in credit card authorizations and related transactions. VISA 
now is receiving close to 5 billion inquiries per year over switched 
and dedicated telephone lines, and that number is growing by more 
than 500 million each year. 

In addition to being a major telecommunications user, VISA is 
also a substantial provider of electronic publishing services. Trans- 
action processing is by far the largest segment of the information 
services market. 

Because of the importance of telecommunications to VISA, we 
have been an active participant in various FCC and State public 
utility commission proceedings. That participation and our activity 
in the marketplace have taught us a few things about tele- 
communications regulation. 



54 

First and foremost, competition, competition, and competition are 
the three most important factors in improving telecommunications 
service quality, bringing new and innovative services to the market 
quickly, and reducing prices. Enlightened regulation is a fourth im- 
portant factor because it encourages the development of competi- 
tion. 

The appearance and growth of competition in the long distance 
and equipment markets has enormously benefited both large users 
like VISA and consumers. Competition has, for example, improved 
the speed of credit card authorizations, driven down the cost of 
queries, and provided a cost effective means of requiring authoriza- 
tion of nearly every credit card transaction, which substantially re- 
duces credit card fraud. 

We are absolutely certain the introduction of competition in the 
local exchange market, the last mile and the last bastion of monop- 
oly, will have similar effects. S. 1086 would bring us closer to that 
goal and VISA therefore supports it. 

Second, the success of new legislation and the regulations that 
implement it will be measured by its ability to produce substantial 
results in a timely fashion. If efforts to introduce competition into 
the local communications market are to succeed, the Congress must 
assure that straightforward, enforceable standards govern access to 
essential network services and ensure a level playing field for users 
and competitive service providers. 

The standards supported by VISA are both simple and com- 
prehensive, and all of them are found in one form or another in S. 
1086. 

First, we urge the committee to require the RBOC's to provide 
all information services through fully separate subsidiaries. Be- 
cause when all is said and done, structural separation remains the 
only effective means of protecting competition and captive rate- 
payers from discrimination and potentially unlawful cross-sub- 
sidization. Separation will also facilitate FCC enforcement of other 
safeguards such as rules governing nondiscriminatory access. 

Section 233 of the bill embodies much of what we seek in this 
regard, although it creates considerable confusion by referring to 
"information services" in section 233(a) and then using the more re- 
strictive phrase "electronic publishing" in section 233(b)(1), only 
four lines later. VISA disagrees with efforts to impose different 
standards on content based, as opposed to noncontent based infor- 
mation services. Indeed, based on our own experience, we doubt 
that the two can even be distinguished. 

We urge the committee to use the phrase "information services" 
throughout the section. I understand that this was the approach 
taken in legislation introduced by Senator Inouye last year. It was 
the right solution then, and it is the right solution now. 

Second, we recommend adoption of a strong, clear nondiscrimina- 
tion requirement to govern the provision of essential services to 
independent entities that seek to compete with local telephone com- 
panies. What is needed is something akin to the MFJ's successful 
equal access requirement. The owners of the local exchange compa- 
nies should be prohibited from offering themselves or their affili- 
ates' services, including features, functions, and interconnections, 



55 

that they do not offer on at least equivalent terms to independent 
providers. 

Third, we support efforts to strengthen existing FCC enforcement 
mechanisms so that violations of the above requirements can be 
dealt with swiflly and effectively. 

Finally, we note with approval your efforts to accelerate stand- 
ards development and mandate coordinated network planning. In- 
creased coordination is essential to a compatible telecommuni- 
cations infrastructure. While some carriers solicit input as new 
products and services are deployed, such efforts are the exception 
and not the rule. Section 230 of the bill seeks to cure this problem, 
but as presently written section 230 neglects to include users 
among tnose tasked with developing standards to ensure network 
interconnection. We urge the committee to correct this oversight by 
including users, the intended beneficiaries of network innovation, 
in such efforts. 

S. 1086 goes a long way to meeting our concerns and VISA is 
therefore pleased to support it. Beyond the suggestions made 
above, we have three technical suggestions which are detailed in 
my written statement. 

Thank you very much for the opportunity to appear here before 
you today to present VISA International's view on this important 
legislation. 

[The prepared statement of Mr. Coe follows:] 

Prepared Statement of Kermit Coe 

Mr. Chairman, and distinguished Members of the Subcommittee on Communica- 
tions, my name is Kermit Coe. I am the Director of the VisaNet Market Develop- 
ment Group of VISA International, and I am pleased to have this opportunity to 
testify in support of 5.1086, the Telecommunications Infrastructure Act of 1993. 

INTRODUCTION AND BACKGROUND 

VISA International is an association of over 21,000 financial institutions through- 
out the world that are licensed to use its service marks in connection with payment 
systems (notably credit and debit cards), check authorizations, automated teller ma- 
chines and related services. VISA is the world's most widely used and accepted cred- 
it card. The approximately 300,000,000 VISA cards now in circulation are accepted 
by 10 million merchants around the world. Last year alone, nearly 6 billion trans- 
actions were completed using a VISA card. 

Communications is the lifeblood of VISA. It's been said that modem banking con- 
sists largely of computers talking to each other over telephone lines about money, 
and nowhere is that more true than in credit card authorizations and related trans- 
actions. VISA is now receiving close to 5 billion inquiries per year over switched and 
dedicated telephone lines, and that number is growing oy more than 500 million 
each year. 

In addition to being a major telecommunications user, VISA is also a substantial 
provider of information and electronic publishing services. Although few people real- 
ize it, as the numbers above indicate transaction processing is by far the largest seg- 
ment of the information services market. 

Because of the importance of telecommunications to VISA, we have been an active 
participant in various FCC and state public utility commission proceedings. That 
participation, and our activities in the marketplace, have taught us a few things 
about teleconmiunications regulation that I'd like to share with you today. 

THE IMPORTANCE OF COMPETITION 

First and foremost, competition, competition, and competition are the three most 
important factors in improving telecommunications service quality, bringing new 
and innovative services to the market quickly, and reducing prices. Enlightened reg- 
ulation is a fourth important factor, because it encourages the development of com- 
petition. 



56 

The appearance and growth of competition in the long distance and equipment 
marfcets has enormously benefited both large users like VISA and consumers. Com- 
petition has, for example, improved the speed of credit card authorizations, driven 
down the cost of queries and provided a costffective means of requiring authoriza- 
tion of every credit card transaction, which substantially reduces credit card fraud. 
We are absolutely certain that the introduction of competition in the local exchange 
market — the 'last mile" and last bastion of monopoly — will have similar effects. S. 
1086 would bring us closer to that goal, and VISA therefore supports it. 

Second, the success of new legislation and the regulations that implement it will 
be measured by its ability to produce substantial results in a timely fashion. Here, 
the FCC's Open Network Architecture ("ONA") initiative is a model of how not to 
proceed. ONA was to be the mechanism for unbundling local network services so 
that information service providers could purchase only those features and functions 
that they needed to bulla their own services. VISA, in coalition with other financial 
service providers, devoted substantial time and resources to ONA. But good inten- 
tions proved insufficient. Almost no one buys ONA services today if they have a 
choice; indeed, information service providers spend a fair amount of time fighting 
off efforts to compel them to take services under ONA tariffs. The FCC has not 
given up, but when it recently took important steps to open up local exchange net- 
works, it did so through an entirely new proceeding. 

The lessons of ONA should not be lost on this Committee. If efforts to introduce 
competition into the local communications market are to succeed, the Congress must 
assure that straightforward, enforceable standards govern access to essential net- 
work services and ensure a level plajdng field for users and competitive service pro- 
viders. 

CREATING AN ENVIRONMENT THAT FAVORS COMPETITION 

The standards supported by VISA are both simple and comprehensive, and all of 
them are found in one form or another in S. 1086. 

First, we urge the Committee to require the RBOCs to provide all information 
services through fiilly separate subsidiaries. When all is said and done, structural 
separation remains the only effective means of protecting competition and captive 
ratepayers from discrimination and potentially unlawful cross-subsidization. Separa- 
tion will also facilitate FCC enforcement of other safeguards, such as the rules gov- 
erning nondiscriminatoiT access. 

Section 233 of the Bill embodies much of what we seek in this regard, although 
it creates considerable confusion by referring to "information services" in Section 
233(a) (page 24, line 13), and then using the more restrictive phrase "electronic pub- 
lishing" in Section 233(bXl), four lines later. VISA disagrees with efforts to impose 
different standards on "content-based" as opposed to "non-content based" informa- 
tion services — indeed, based on our own experience, we doubt that the two can even 
be distinguished. We urge the Committee to use the phrase "information services" 
throughout the Section, understand that this was the approach taken in legislation 
introduced by Sen. Inouye last year. It was the right solution then, and it is the 
right solution now. 

Second, we recommend adoption of a strong, clear nondiscrimination requirement 
to govern the provision of essential services to independent entities that seek to 
compete with local telephone companies. While the Communications Act's prohibi- 
tion on "unreasonable discrimination" is appropriate in many circumstances, it is in- 
adequate to protect against self-dealing by entities which are both monopoly provid- 
ers and competitive consumers of essential services. What is needed in such situa- 
tions is something akin to the MFJ's successful "equal access" requirement. Section 
229(c) of the Bill should accordingly be amended to reauire telcos to furnish features 
and functions to information service providers and otner large users that are "eco- 
nomically and technically equivalent to those that they provide to themselves or 
their affiliates. As a corollary, the owners of local exchange companies should be 

f)rohibited from offering themselves or their afTiliates services (including, features, 
unctions and interconnections) that they do not offer on at least equivalent terms 
to independent providers. 

Thira, we support efTorts to strengthen existing FCC enforcement mechanisms so 
that violations of the above requirements can be dealt with swiflly and effectively. 
Thus, we urge the Committee to consider modifying the "patently unlawful" stand- 
ard of tariff review, which permits almost all tariffs to go into effect pending inves- 
tigation and allows a carrier to exploit an unfair competitive advantage for months 
or years until an investigation is completed or a formal complaint can be resolved. 
Finally, we note with approval your efforts to accelerate standards development 
and mandate coordinated network planning. Increased coordination is essential to 



57 

a compatible telecommunications infrastructure. While some carriers solicit input as 
new products and services are developed, such efforts are the exception, not the 
rule. Section 230 of the Bill seeks to cure this problem, but as presently written Sec- 
tion 230(d)(lXA) (p. 15, lines 10-16) neglects to include users among those tasked 
with developing standards to ensure network interconnection. We urge the Commit- 
tee to correct this oversi^t by including users — the intended beneficiaries of net- 
work innovation — in such efforts. 

S. 1086 goes a long way to meeting our concerns, and VISA is therefore pleased 
to support it. Beyond the suggestions made above, we suggest three technical 
changes: 

• The definitions should be amended to make it clear that electronic publishing 
services are a subset of information services. 

• The phrase "network functions" as used in Section 229(cX4) (oage 11, lines 4- 
5) is undefined and has no clear meaning in the industry. We ask that you consider 
substituting "operations, support, signaling and control systems", or admng a defini- 
tion to the same effect. 

• The words "other than the customer to which it relates" should be inserted 
after the word "person" in Section 234(aXl)" (page 28, line 6) in order to make it 
clear that a customer is always entitled to his or her own Customer Proprietary 
Network Information. 

Thank you very much for the opportunity to appear before you today to present 
VISA International's views on this important legislation. I would be pleased to an- 
swer any questions. 

Senator Inouye. Thank you very much, Mr. Coe. Now, may I call 
on Mr. Niggli. 

STATEMENT OF MICHAEL NIGGLI, SENIOR VICE PRESIDENT, 

ENTERGY CORP. 

Mr. NiGGLl. Thank vou, Mr. Chairman, good morning. Grood 
morning to members of the committee. I would like to thank you 
for the opportunity to speak with you today. We are here today be- 
cause members of the committee staff have heard about PowerView 
and are intrigued by its potential applications. And frankly, we are 
excited about its prospects. We hope to bring to you a new perspec- 
tive on how advanced communications technology can be used in 
my industry, the electric power industry. 

Entergy serves about 1.7 million electric utility customers in the 
primarily rural States of Arkansas, Mississippi, and Louisiana. We 
are continually looking for ways to better serve our customers, re- 
duce bills, and concurrently reward our shareholders. The 
PowerView system, we believe, will help us do all three. Today, I 
would like to briefly tell you about what the PowerView system is 
and how we plan to use it. 

PowerView is a high-capacity bidirectional communications sys- 
tem that connects us directly to our customers. PowerView allows 
us to link up with our customers in an effort to improve the effi- 
cient use of electric energy. The result will permit us to defer or 
displace the need for certain new powerplants in the future, thus 
saving our customers money. 

PowerView allows the customers to make active choices on how 
he or she will participate in energy conservation and efficiency 
measures. PowerView provides a continuous automated feedback 
system that permits verification of actions taken by the utility or 
the customer to control energy consumption. In short, it provides 
us with an educated, active consumer and an automated feedback 
system that helps us reduce our cost of service. 

How do we plan to use PowerView and its related system? A cou- 
ple of examples might best explain how we plan to use this system 



58 

for energy efficiency, conservation, and customer service improve- 
ments. First, we intend to send continuous and current pricing sig- 
nals to our customers, a spending rate, if you will, the price of elec- 
tricity. This price will vary over time. It can vary over tirne of day, 
it can vary over the time of the week, or on a seasonal basis. 

Customers react to spending rates, and especially if they have 
current information. They will change their consumption patterns. 
They will actually move energy from onpeak to offpeak periods, 
similar as to the situation that many other industries have used 
to price their products. We do not use that concept substantially 
today, but we have an opportunity to now. 

Have you ever heard of the concept of an energy sale from your 
electric utility — one-half price sale? Probably not. We have the op- 
portunity, we believe, with this type of communications system, on 
Wednesday to give you a signal that says Saturday and Sunday 
you have one-half or three-quarter price energy sale. 

Why would an electric company do that? Primarily for two rea- 
sons. One, to get you to shift your consumption to an offpeak pe- 
riod, and second, because I have personally 3 to 4 billion dollars' 
worth of plant sitting idle on Saturdays and Sundays. 

We intend to give our customers choices on appliance control. An 
example might help here. We may give a customer an option A — 
option A is a discount, possibly 3 percent or some number like that, 
if he allows us to control an air conditioner in their home. That 
control would be in 15-minute increments every couple of hours 
during the peak periods. Another customer might choose option B. 
Option B is the air conditioning control and a water heater control. 
Option C could be air conditioning, water heating, and another ap- 
pliance. 

The whole point I am making here is that customers would have 
the option, they would make the selection on these types of control 
devices, and we would then have the opportunity to control the con- 
sumption from a remote location to help our system achieve a lower 
peak demand and possibly to better utilize our facilities. 

We also intend to provide itemized billing. We believe that an 
educated customer is essentially our best customer. In terms of 
itemized billing, this has been done by the telephone companies for 
decades. What do you get on your electric bill? You get two lines. 
One line says your energy consumption, the second line says your 
bill. Well, what we are hoping to do with this type of a system is 
to tell you that out of that $120 bill you may have had last month, 
$77 was for air conditioning, $34 is for lighting, $12 is for your re- 
frigerator, that type of information. What does that give to you? 
That gives you, the consumer, the opportunity to make a good 
choice as to how you will use the energy in the future. 

We have other applications for the PowerView system, including 
remote on/off devices. When people move in and out of apartments 
or homes we would have the ability to turn them off remotely rath- 
er than dispatching someone in a hardhat and a truck to go out 
and turn on or turn off the service. 

We also would have the opportunity for poweroff indication 
where we would know if your service is off. Right now, when your 
service is off, you have got to call us. We would have the oppor- 
tunity for automatic indication. Now, we have several other oppor- 



59 

tunities with this type of a system that can be applied to the elec- 
tric utility industry. 

In summary, Entenergy is rapidly pursuing the development and 
deployment of PowerView. We will be using our existing fiber optic 
backboned system which extends the length of our service territory 
to interconnect with our customers. Our backbone system goes 
through towns such as Brookhaven, Tylertown, Onward, MS; Boga- 
lusa, Bastrop, and Slidell, LA. 

The electric utilities have communicated with their customers 
and own facilities in many ways for decades. We are excited about 
bringing this advanced technology to bear on the issues of energy 
conservation and efficiency, and for the benefit of our customers. 

We thank you for the opportunity to speak today. 

[The prepared statement of Mr. Niggli follows:] 

Prepared Statement of Michael R. Niggli 

introduction 

Good morning. My name is Michael R. Niggli. I am the Sr. Vice President for 
Marketing with Entergy Corporation. Entergy Corporation is an electric utility hold- 
ing company that serves approximately 1.7 million customers in the states of Arican- 
sas, Mississippi, and Louisiana. This service is provided by four subsidiaries of 
Entergy Corporation: Aritansas Power & Light Company, Louisiana Power & Light 
Company, Mississippi Power & Light Company, and New Orleans Public Service, 
Inc. We currently have pending before various regulatory agencies a merger with 
Gulf States Utilities Company. Approval of the merger will increase the number of 
customers served to 2.3 million, and will add service area in southeast Texas and 
western Louisiana. I would like to thank the subcommittee for the opportunity to 
provide testimony at today's hearing. 

SUMMARY 

The purpose of my testimony is to identity the role that electric utilities can play 
in estaolisning the information superhighway" to the residential customer. Furtner, 
I will briefly describe a project that Entergy currently has underway in Little Rock, 
Arkansas, which is bringing a high capacity fiber optic/coaxial cable infrastructure 
to the residential customer. This project utilizes the "PowerView" technology to de- 
ploy cost-effective energy efficiency and conservation programs. The PowerView 
technology has been jointly developed by Entergy and First Pacific Networks (a 
technology supplier headquartered in Sunnyvale, California.) 

Entergy Corporation believes that electric utilities have a definitive role to play 
in establishing a high capacity information system to the residential customer. This 
can happen in a time frame that otherwise may not be achievable without the eco- 
nomic justification brought to bear by our industry. This economic justification is 
driven by energy efiiciency and conservation in the form of "demand-side manage- 
ment" programs and concepts. These demand-side management pro-ams can help 
defer or displace the need for new generating facilities, thus economically-justifying 
the installation of PowerView. Implementation of PowerView on a commercial basis 
will permit the deferral or displacement of new electric capacity at least equivalent 
to a large coal-fired generating unit on the Entergy system. 

Exhibit 1 depicts the economic justification (in terms of benefit/cost ratio) and the 
potential impact that PowerView can have on the Entergy system. The potential im- 
pact of PowerView is significant because the system (1) effectively combines a num- 
ber of demand-side management applications (as discussed later), and (2) is flexible 
to adapt to future applications. Exhibit I also depicts the impacts of numerous other 
demand-side applications that Entergy is pursuing. The graph illustrates that 
PowerView can be one of the more dominant mechanisms for implementing effective 
demand-side management programs. 

PROGRAM DEPLOYMENT 

Entergy is pursuing rapid deployment of the PowerView technology. Entergy's in- 
volvement with PowerView and First Pacific Networks has been approved by the Se- 
curities and Exchange Commission, without opposition or intervention by any pri- 
vate party or regulatory agency. 



70-334 0-94-3 



60 

On December 1, 1992 Entergy submitted a filing simultaneously to its four retail 
regulators regarding the Company's proposed Least Cost Plan. The Least Cost Plan 
(LCP) includes Entenerg/s 20 year outlook for new resources required to meet cus- 
tomer needs. The LCP filing identifies PowerView as the focal demand-side manage- 
ment program in our service area. For that reason, the PowerView application has 
been reviewed, along with other proposed programs, during a series of three public 
conferences held in Entergy's service eirea. These conferences have been attended by 
representatives of the respective public service commission staffs and/or their con- 
sultants, major industrial customers, contractors, environmental organizations, var- 
ious state agencies, senior citizen groups, and other special interest groups. The Ar- 
kansas PubUc Service Commission has recently noted that PowerView is the most 
innovative program to be included in Entergy's demand-side management filing. 

The LCP filing notes that PowerView is expected to penetrate at least 442,000 
homes in the current Entergy service area. This includes homes in urban, suburban 
and rural locations in Arkansas, Louisiana, and Mississippi. Entergy's fiber optic 
back-bone system — which extends over 700 mUes — will bring the opportunity for 
PowerView to be deployed to a wide range of customers throughout the company's 
service area. Further penetration is anticipated as Entergy's infrastructure costs are 
reduced over time. Entergy plans to deploy PowerView to 10,000 homes in the first 
fill' year of commercial operation (now scheduled to begin in 1994). 

Entergy and First Pacific Networks are currently deploying the technology as a 
pUot research and development program in a suburb of Little Rock, Arkansas. The 
pilot project Gcnown as Customer Choice 2000) has completed installation of a fiber 
optic/co£odal cable infrastructure to 50 homes in the test area. The PowerView tech- 
nology, with fully functional intelligent utility units, will be connected to these 
homes during the 3rd and 4th quarters of 1993. The initial work on Customer 
Choice 2000 has been enthusiastically received by our participating customers. We 
intend to follow through with a series of customer interviews to obtain feedback on 
customer satisfaction with this advanced technology. The results of this pilot pro- 
gram will be used to further enhance the scheduled commercial deployment of the 
technology in 1994. 

THE NEED FOR POWERVIEW 

The electric utility industry requires large sums of capital to fund the installation 
of major generating facilities to accommodate new growth in our society. We are al- 
ways seeking new and more efficient ways to utilize that capital in meeting require- 
ments that our customers place on our service. The focus on energy efficiency and 
conservation is one that allows the electric utility industry to defer or possibly dis- 
place the need for large generating facilities, thereby deferring the need for large 
amounts of capital expenditures. In many cases the deferral of these large generat- 
ing facilities provides the economic justification for installation of a fiber optic/co- 
axial cable network. The establishment of a bi-directional, high capacity communica- 
tions network with our customers will permit the implementation of cost effective 
demand-side management applications and potential operating cost reductions. 

Exhibit 2 identifies the problem that the electric utilities are attempting to ad- 
dress. Essentially, our industry constructs facilities with sufficient capacity to serve 
the needs of our customers at peak load periods. During off-peak hours, the systems 
have excess capacity available to serve additional load. Given that we generally con- 
struct new facilities to meet peak load requirements, it can be economically bene- 
ficial to shift demand requirements of our customers from the peak load period into 
the off-peak period where additional capability is available. Certain energy con- 
servation and efficiency programs can assist us in moving our peak load to an off- 
Seak period, thus deferring the need for new capacity. These programs include (1) 
irect control of customer appliances (as selected by the customer), (2) flexible time- 
of-use pricing, and (3) energy efficiency education. Entergy believes that utilization 
of high-capacity information technology can assist in cost effectively shifting this 
load, as explained later. 

Many industries are faced with the same problem of constructing or acquiring fa- 
cilities to meet p)eak load demands. Several industries have attempted to ad<fress 
the issue through establishment of advanced information systems. For instance, 
telephone companies, overnight delivery services, movie theaters, and other indus- 
tries have addressed this problem through peak load pricing, wherein they price the 
utilization of their service during on peak periods at rates higher than during off- 
peak time periods. This allows the customer to determine the value they place on 
the transaction during peak periods, and possibly shift demand to a period when 
the service is less expensive. This permits tnese industries to better utilize their in- 



61 

frastructure, construct fewer facilities, and be more efficient serving customer re- 
quirements. 

ELECTRIC UTILITY APPLICATIONS 

As noted in Exhibit 3, Entergy anticipates utilizing a high-capacity information 
system to the residence in order to apply certain demand-side management and 
operational applications to the utility customer. Current technologies allow the 
transmittal of voice, video and data on a single infrastructure via various commu- 
nications media, including coaxial cable and fiber optic facilities. The capacity of 
such a system is generally maximized when utilizing fiber optic conmiunications ca- 
pabilities and is quite cost effective when the installation includes a fiber optic/co- 
axial cable infrastructure. The electric power industry could possibly use this tech- 
nology in a cost-effective manner for the following applications: (1) demand-side 
management with continuous, automated feedback, (2) accumulation of customer 
usage information (i.e. load research), (3) remote reading of meters which could be 
applicable to electric, gas, water, and other devices, (4) automated billing for con- 
sumers, (5) remote turn on/turn off capabilities, (6) automated "power-ofF indica- 
tion, (7) automated current diversion, (8) distribution automation, and (9) enhanced 
customer service. 

Exhibit 4 identifies some of the specific opportunities that can be implemented 
with demand-side management via a high-capacity communication system. First, 
the utility has the opportunity for verifiable load control options, including the posi- 
tive identification of control applications as well as the establishment of various 
time of use pricing applications. Demand-side management programs throughout 
the nation have often suffered from a perception, and sometimes reality, that the 
savings associated with these programs were "soft" or non-existent. This occurs be- 
cause the efi"ect of many programs cannot be directly measured, or are engineering 
estimates. For example, a program that provides a rebate for an energy-efficient re- 
frigerator assists in promoting the installation of such refrigerators. However, such 
a program does not measure effectiveness over any time period, nor does it ensure 
that the refrigerator will not be relocated out of the utilities service area. The appli- 
cation of a high-capacity information system implements verifiable demand-side 
management savings and provides immediate feedback to the utility to quantity the 
results of our various programs and control actions. This is a substantial advance 
in our ability to determine — in a much more accurate manner — the cost-effective- 
ness of various demand-side management options that are implemented. 

The immediate feedback of results via the bi-directional communication system 
will significantly enhance the operability — and acceptability — of demand-side appli- 
cations in the electric utility industry. Such immediate verification of results pro- 
vides the utility system operator with an acceptable option for meeting the real-time 
energy needs of his customers. This allows demand-side applications to be consid- 
ered equally with supply side alternatives, and thereby enhance the penetration of 
energy efficiency and conservation efforts. 

Next, with respect to demand side management, a high capacity information sys- 
tem provides flexibility to approach real-time pricing. Installation of appropriate 
communications infrastructure allows the electric utility flexibility in the pricing of 
energy and in the establishment of time periods applicable to its pricing structure. 
These time periods could be established with an eye toward conserving energy on 
peak and promoting consumption during off peak periods when capacity is available 
for consumers. This also defers the need for new generating facilities to be con- 
structed. A real-time pricing scheme can be established wherein pricing signals can 
actually be sent, if desired, at intervals as small as every 6 seconds. Further, it will 
be possible to approximate the consumption of each and every major appliance in 
a household and provide the customer with an itemized bill. This type of itemized 
biU provides significant new information to the customer regarding the consumption 
patterns of home appliances. Moreover, it encourages energy awareness on the part 
of the customer resulting in a more efiicient utilization of energy. With a system 
such as PowerView, the utility also has the ability to provide energy efficiency edu- 
cation materials in a video mode. Finally, as an adjunct to pricing flexibility, energy 
companies could offer energy "sales" wherein off-peak power (both night-time and 
weekends hours) is priced substantially lower than during on-peak periods. This 
provides the customer with choices in consumption patterns based on affordability 
and value of energy at any point in time, and further encourages the most efficient 
utilization of energy. 



62 

CONCLUSION 

Electric utilities have communicated with their customers and field facilities for 
several decades via the establishment of electronic meter reading, demand-side 
management applications, direct teleconununication services, and distribution auto- 
mation. The electric utility industry is also one of the most capital intensive indus- 
tries in our society. The capital investment per customer in the electric utility indus- 
try is often 6-7 times greater than the investment of contemporary communication 
services to the home. The opportunity to defer new capital requirements through 
cost-effective conservation and efliciency programs is an attractive alternative for 
many companies. As a result, implementation of cost-effective demand-side manage- 
ment applications by the electric utility industry can bring significant improvement 
in the communications infrastructure within the United States. We are confident 
PowerView can play that role. 



EXHIBIT 1— POWERVIEW 



POWERVIEW DOMINATES DSM COMPARISONS 



400 



300 



200 



100 



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BENEFIT/COST RATIO 
TOTAL RESOURCE COST TEST 



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63 



EXHIBIT 2— POWERVIEW 



- DEMAND SIDE MANAGEMENT IMPACTS 



PEAK 

LOAD 





PEAK LOAD 
SHAVING 




VALLEY FILLING 

- TYPICAL DAILY LOAD PROFILE - 



MID 
NIGHT 



6 AM NOON 

TIME 

EXHIBIT 3— POWERVIEW 



6 PM 



MID 

NIGHT 



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LOAD MANAGEMENT SYSTEM 



UTILITY COMMUNICATIONS 
COMPANY MEDIA 



VOICE? 

VIDEO 

DATA 



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DEMANE>5IDE MANAGEMENT 
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64 

EXfflBIT 4 — POWERVIEW 





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DEMAND SIDE MANAGEMENT 



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- TIME-OF-USE APPLICATIONS - 

- CONTINUOUS FFFDBACK " 

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ENERGY EFFICIENCY EDUCATI 



-[ ♦"ENERGY "SALE" 




Senator Inouye. Thank you very much, Mr. Niggli. May I now 
call on Mr. McBee. 

STATEMENT OF GARY McBEE, VICE CHAIRMAN, UNITED 
STATES TELEPHONE ASSOCIATION 

Mr. McBee. Thank you, Mr. Chairman and members of the sub- 
committee. I am here representing the United States Telephone As- 
sociation and 1,100 local company members. I would like to point 
out the problems that we see with S. 1086 as currently written, 
and also point out some of the areas we feel the legislation is mov- 
ing in the exact correct direction. 

We do not deny that competition is the wave of the future, nor 
do we deny that it is currently in existence. There is substantial 
competition, as Mr. Crowe has pointed out, in those areas of our 
service that are the most lucrative. There are coalitions that are 
being formed every day between traditional businesses that were 
not even in the same industry 5 years ago. The competitive access 
providers are providing very good service and I think that was well 
spelled out. 

The problem is the way the current pricing structure is set up 
in the United States that creates an umbrella for them to come in 
and underprice services that are provided by the local companies 
and gain substantial benefits from that service. I think Congress 
would, in fact, enhance consumer opportunities all over the coun- 
try, small consumers as well as large, by freeing the exchange car- 
riers to do more services, as you have spelled out that you intend 
to do with cable. 



65 

No. 3, I think the changes must be made to the current pricing 
structure in the United States. S. 1086 overturns the current regu- 
latory regime in terms of how the pricing would be done. But I do 
not think that it adequately addresses what the replacement might 
be, nor is there an understanding of how that might be accom- 
plished in a cost-effective way. 

Universal service across this country has been made possible by 
regulatoiy pricing strategies that, in fact, shift huge amounts of 
revenue from low cost areas to high cost areas, from business cus- 
tomers to residential customers, from long distance users to 
nonlong-distance users. That process has been put in place over 
time, with an idea in mind that all customers in the United States 
ought to have access to low priced telecommunications service or 
universal service. 

I think the FCC has attempted in the past to try to deal with 
the whole issue of changing price structures, and as they have done 
that I think they found that it will not work the way they did it 
originally. Their intent initially was to put the cost for universal 
service on access charges or the off ramps, as was referred to ear- 
lier. And that is where competitive access providers see an oppor- 
tunity to move into the marketplace and, in fact, do. And that is 
a reasonable result of high priced services such as we are offering. 
That price structure has to be redone in some way so that you do 
not artificially increase the price of some services and introduce 
competition where it need not be. 

To try to point this out or spell this out and make the whole idea 
of pricing within the industry better understood by the committee, 
USTA has asked to have a study done — it was completed by strate- 
gic policy research — to look at what are the excess revenues that 
are currently included in only two services — one of them being ac- 
cess, the other being long distance that is provided by the local 
companies. That study, which will be released within the next 
week or two, indicates that the pricing anomaly there represents 
a low number of $18.3 billion nationally and a high water mark of 
$21.1 billion, and that is price above cost — just price above cost. As- 
suming that you were to fix that pricing anomaly and charge the 
individual end-user customer the appropriate price for their serv- 
ice, every customer in the United States would have to pay ap- 
proximately $12 more per month just to take care of that anomaly. 

That, of course, does not even take into consideration the prob- 
lems that you have in rural communities where the costs are sub- 
stantially higher, even, than they are in the rest of the countiy. 
The rural customer, in some cases, as pointed out very adequately 
before, have a very cost because of the low density. And the cost 
to serve in those areas is extremely high, and without a mechanism 
to fund the service in those area, the rural customer would be re- 
quired to pay substantially more than they are today. One exam- 
ple, in California we have exchanges within Pacific Bell where the 
rate to provide service would be $105 a month in Baker, CA. Now, 
I do not think that we would ever anticipate Baker residents pay- 
ing $105 a month, but that is the type of anomaly that is in the 
pricing structure today. 

One of the reasons that USTA is opposed to the bill is that the 
FCC is required — would be required in some way — to provide for 



66 

universal service, to maintain lifeline and linkup program, and the 
lifeline program in California alone has 1,800,000 customers that 
have lifeline service in California. They pay one-half of the local 
service rate for that State. That has to be taken into consideration, 
I think, as we move forward. Because of these reasons and our 
great concern for what might happen to the rural customers and 
the rural exchanges, currently USTA will not support S. 1086 as 
it is written. However, we do think that there are a number of 
things in the bill that are quite positive. And I will point out some 
of them. 

We believe that progress is being made on the repeal of the cable 
cross-ownership — ^progress. 

We think that seeking to share the cost of universal service 
among all the providers is an excellent step forward, but the ques- 
tion remains how is that done and how long will the argument be 
for how much that is and who is going to pay for it? 

I think you are moving in the right direction of having competi- 
tors have equal rules applied to tnem. I think that is a definite 
positive, and the statement for pricing flexibility is absolutely nec- 
essary in a competitive world. I think the legislation certainly has 
building blocks for building a future telecommunications structure 
in this country, and USTA will look forward to working with the 
committee members in producing such legislation. 

Thank you. 

[The prepared statement of Mr. McBee follows:] 

Prepared Statement of Gary McBee 

Good morning Mr. Chairman, members of the subcommittee, I am Gary McBee. 
I am a director of Nevada Bell and just recently retired from Pacific Bell where I 
served as executive vice president of external aftairs. I am the vice chairman of the 
United States Telephone Association (USTA) on whose behalf I am testifying today. 

On behalf of all the members of USTA, Bell and independent, small, medium and 
lai^e, my testimony seeks to identify problematic elements of S. 1086, while high- 
lighting the leadership the legislation demonstrates in other areas. 

With more than 1100 local exchange carriers as member companies, USTA pro- 
motes the general welfare of the telephone industry, provides information and as- 
sistance to member companies, and serves as the industry's liaison with the federal 
government and regulatory agencies. 

I. INTRODUCTION 

Mr. Chairman, my testimony seeks to convey three messages: 

• First, competition to local exchange carriers exists today and will increase re- 
gardless of federal legislative action. Traditional state and federal regulatory poli- 
cies increasingly expose local exchange carriers to competition while advances in 
technology erase not only the lines between enhanced and basic services, but also 
traditional industry boundaries. One of the indications of these changes are the 
daily announcements of strategic business alliances between corporations that were 
previously thought to be in separate businesses.! 

Another barometer of the increase in competition for access services, a sort of pick 
up and deliver service LECs provide to inter exchange carriers, is the percentage 
of access traffic that is exposed to collocaters. A recent USTA survey, a copy of 
which is attached to my testimony, confirms that collocation, the linchpin for com- 
petition to every service provided by LECs, exists or has been requested at 957 local 
exchange carrier* central offices. While these offices represents less than 14 percent 
of all LEC wire centers, they serve almost 80 percent of the industry's access traffic. 

Congress will not capture the benefits of competition for all consumers unless reg- 
ulatory policies which advance the interests of competitors to local exchange carriers 



1 Examples of these alliances include AT&T & McCaw, British Telecom and MCI, TCI/Cox/ 
Teleport, US WestTime Warner and TCI/Time Warner/Micro Soft. 



67 

at the expense of LEG customers and shareowners are preempted. Local exchange 
carriers must have regulatoiy parity, that is they must be treated the same as those 
with whom they are competing. 

• Second, Congress would enhance consumer choice in voice, switched video and 
high speed data services by freeing local exchange carriers to compete in the offer- 
ing of enhanced services, such as S. 1086 would do for cable. Being free to provide 
such services would provide LECs with incentives to modernize the public switched 
network. 

Additionally, providing LECs with the statutory authority to share network 
functionalities and facilities as provided for in S. 570 would ensure small rural ex- 
changes can provide their consumers the same service choices available to urban 
consumers. 

• Finally, while USTA believes changes must be made to current pricing regula- 
tions S. 1086 overturns the traditional utility model of regulation without ensuring 
sufficient support for universal telephone service. S. 1086, we fear, fails to appre- 
ciate the "seismic intensity" the collapse of current LEC pricing structures would 
have on universal telephone service. 

Contributions to the universal service fund, alone, are not sufficient to ensure the 
universal availability of affordable telephone service. 

n. UNIVERSAL SERVICE 

Regulators have consciously built universal service support flows into LEC rate 
structures. S. 1086 directs the Federal Communications Commission (and states act- 
ing in conformity with the directives of the Commission) to take on the monumental 
task of ensuring universal service by providing the following in a fully competitive 
market: 

• Support mechanisms such as the high cost fund (which flows to companies with 
high nontraffic sensitive costs) Lifeline and Linkup Programs (which benefit low in- 
come individuals); 

• Support flows between customers for the same service through rate averaging 
(such as support from high volume to low volume users, and from low cost urban 
areas to high cost rural areas); and 

• Support flows between services; (such as from access charges to residential 
service and from business services to residential services). 

To assist policy makers appreciate the extent of this last support mechanism, that 
is "support between services" such as access and intra-LATA toll services, USTA 
commissioned a studv by Strategic Policy Research (SPR). 

The SPR study, which USTA plans to release upon completion, will establish the 
margin between revenues and costs of providing access and intra-LATA toll services. 
This margin embodies a contribution which has been traditionally used to support 
the provision of telephone service to small business, residential and rural customers. 

Preliminary results of the SPR study indicate these contributions, on an 
annualized basis, to be no less than $18.3 billion, and perhaps as high as $21.1 bil- 
lion. To put these numbers in perspective, they are twice the annual earnings of 
the entire local exchange industry. 

USTA also asked Bellcore to compile data from studies previously prepared by 
their client companies to assess the amount of contribution received by local resi- 
dential and business customers for access to telephone service. The Bellcore num- 
bers mirror those of SPR in identifying support for local telephone service. 

USTA will share both of these studies with the subcommittee upon completion. 

Absent contributions from access and toll services on the order of $18 billion to 
$21 billion, residential consumers would be required to pay the full costs of their 
local telephone service. On average, this would require residential customers to pay 
twice as much for local telephone service. 

And Mr. Chairman, this estimate does not take into consideration the additional 
support necessary for provision of local telephone service in rural areas. 

Because of the gap between costs and revenues in access and intra-LATA toll 
services, it should come as no surprise that it is in this area cable companies, com- 
petitive access providers and other competitors, including interexchange carriers are 
concentrating their efTorts. And you will remember I indicated that collocation either 
exists today or has been requested at the central offices which provide almost 80 
percent of the access traffic handled by the industry. 

While S. 1086 requires all telecommunications providers to contribute to universal 
service, the SPR study demonstrates such contributions alone will not be sufficient. 
Legislation which mandates competition must also detail the way in which it wiU 
provide safeguards for residential and rural consumers. 



68 

USTA is further troubled that S. 1086, by preemoting state and local franchising 
authority, deprives those jurisdictions of the tools tney nave traditionally employed 
to ensure the universal availability of affordable telephone service. 

ni. TELECOMMUNICATIONS ENVIRONMENT: CONVERGENCE OF TECHNOLOGfY AND 

BLURRING OF MARKETS 

Dramatic changes are underway in the teleconmiunications marketplace. Regu- 
latory policies are increasingly opening local exchange carriers' central ofiices to 
competitors, as advances in technology erase not only the lines between enhanced 
and basic services, but also traditional industry boundaries. The result of these 
changes are strategic business partnerships which are announced on a daily basis. 

These alliances between traditional long distance, cellular, competitive access and 
cable providers reflect the coalescence of technologies and markets. Eadi of these 
partherships adds to already significant competition for local telecommunications 
services — services which have traditionally supported universal service. 

K these market and technological developments are to serve the public, and not 
just serve competitors to local exchange carriers, public policy makers must ensure: 

• Universe service and ubiquitous infrastructure development do not become the 
victims of competitors' ability to selectively serve only the most profitable portions 
of the local telecomuunications market; and 

• Local exchange carriers are freed from a regulatory paradigmrich was crafted 
to govern a monopoly environment that no longer exists. 

S. 1086, as currently drafted, does not fully achieve either of these goals. 

IV. LEGS MUST BE FREED TO FOLLOW WHERE THE MARKET PLACE AND TECHNOLOGY 

LEAD 

As competitors enter low cost, high volume markets, LECs must be free to re- 
spond to this competition both in the markets we currently serve and those where 
advanced telephone technology provides us with new opportunities. 

Congress would enhance consumer choice in voice, switched video and high speed 
data services by freeing local exchange carriers to comf>ete in the offering of en- 
hanced services, such as S. 1086 would do for cable. Being free to provide such serv- 
ices would provide LECs with incentives to modernize the public switched network. 

A. Cable 

S. 1086 recognizes the cable cross ownership ban of the 1984 Cable Act as one 
such outdated fimitation. 

But even in removing the cable restriction, the legislation establishes an asyra- 
metric regulatory regime for provision of video programming. S. 1086 would: 

• Require a telco to provide video programming transport as a tariffed common 
carrier, while no other provider of video programming, including incumbent cable 
operators, have a similar requirement. 

• Prohibit a local exchange carrier from purchasing more than a 5 percent inter- 
est, joint venture or partner with a cable company in the same service area. 

USTA believes if the price of basic telephone and cable service is regulated, in 
the absence of effective competition, shouWn't these two telecommunications provid- 
ers be free to pursue the same economies of scale every other combination of tele- 
communications services are free to pursue? 

Additionally, the legislation woula mandate the requirement that a telco provide 
video programming through a separate subsidiary that would be prohibited from 
jointly mariceting its telephone and cable services, while this prohibition appears 
also to apply to cable companies which seek to provide telephony services within the 
same area in which they provide cable, USTA believes the prohibition to be bad pub- 
lic policy. 

Steps the Congress should take to free LECs to provide consumers with the bene- 
fits of a fully competitive market place include: 

• Freeing the regional Bell operating companies to manufacture telecommuni- 
cations eguipment under the terms and conditions of S. 173, (Senator Rollings' leg- 
islation of the 102nd Congress); 

• Directing the Federal Communications Commission to restructure its approach 
to regulation so £is to eliminate disincentives to invest and take risks in the provi- 
sion of new services. The Commission's focus should be on regulating the price of 
services which are not subject to competition; 

• Rejecting any efforts such as those of section 11 [Information Services) and sec- 
tion 12 (CPNI Requirements) of S. 1086 to limit the ability of local exchange carriers 
to provide their consumers with the fullest array of information services at prices 
which need not bear the costs of onerous regulatory burdens; and 



69 

• Amending section 229(h) of the legislation to mandate regulators permit pricing 
flexibility. 

Finally, Congress should provide local exchange carriers with the statutory au- 
thority to share network functions and facilities with each other so as to maximize 
the availability of the benefits of the public telephone network. This may be accom- 
plished by enacting legislation providing for infrastructure sharing as articulated in 
S. 570, the "Local Exchange Infrastructure Modernization Act." 

V. ADDITIONAL AREAS OF DISAGREEMENT WITH S. 1086 

USTA further opposes S. 1086 as it would: 

• Impose information service requirements on the Bell operating companies — re- 
quirements federal courts and the FCC have already found are not justified to pro- 
tect competition; 

• Impose a prior written approval requirement for access to customer information 
that local exchange carriers might otherwise utilize to inform customers of public 
switched network services; and 

• Mandate requirements such as number portability and interconnection, at any 
point technically feasible, with insufficient consideration of the economic impact of, 
or demand level for, such requirements. 

VI. AREAS IN WHICH S. 1086 DEMONSTRATES LEADERSHIP 

S. 1086 does include provisions which would promote development of the nation's 
public switched network, among these provisions are: 

• Cable Relief. The recognition LECs must be free to more fiiUy utilize their net- 
works by repealing the cable cross ownership ban including the ability of Bell oper- 
ating companies to operate a cable headend and provide cable service across LATA 
boundaries. 

• Sharing of costs of universal service. Mandating aU providers of telecommuni- 
cations services contribute to universal service. 

• Joint Network Planning. Requiring all telecommunications providers to partici- 
pate in joint network planning and comply with mandated standards for inter- 
connection. 

VII. CONCLUSION 

Mr. Chairman, for the reasons outlined above, as currently drafted, USTA can not 
support S. 1086. 

Still, there is much in S. 1086 which USTA applauds. 

Progress on the repeal of the cable cross ownership ban, seeking to share the costs 
of universal service among all telecommunications providers, attempting to fashion 
a regulatory environment in which providers of like services are treated alike, and 
providing for pricing flexibility are significant building blocks for a national tele- 
communications policy which properly addresses fiiture telecommunications mar- 
kets. 

USTA looks forward to not just the remainder of this hearing, but to the work 
which follows, in which such a national telecommunications policy might be crafted. 

Thank you, and I look forward to your questions. 



USTA DATA REQUEST— INTERCONNECTION EXPOSURE 

A USTA study of 6818 telephone switching locations, representing approximately 
33 percent of all such locations in the U.S., shows that competitive access providers 
collocating in only 14 percent of the 6818 locations can address 80 percent of all ac- 
cess trafiic in those locations. 

These statistics show that CAP's compete only in those areas where high volumes 
of trafiic exist. This allows them to skim off the most profitable LEC business while 
not incurring costs to serve in locations having small quantities of traffic. 

In order to measure the loss of access traffic LECs may face in a competitive envi- 
ronment USTA gathered the attached data. The data were requested from all LECs 
required by the FCC to provide collocation. Nine (9) companies responded. 

The study shows that the responding companies represent 6818 wire centers, 
about 113 of the total wire centers in the US. Nine hundred fifty seven (957) or 14.0 
percent of the 6818 wire centers have collocation, request for collocation or a cus- 
tomer has expressed interest in collocation. 

To measure the risk of lost access trafiic the companies reported the number of 
DSI equivalents in total wire centers, compared to the number of DSI equivalents 



70 

in collocation wire centers. These reports.were separated between switched access 

A DSl is a transport facility representing 24 voice channels. For purposes of this 
study a DSl equivalent is considered to be 9,000 MOU per circuit per month 
(216,000 MOU per DSl). This is the formula used by the FCC in several proceedings 
including CC Docket 91-213, Local Transport. In order for a CAP to have an eco- 
nomic incentive to aggregate traffic there must be adequate volume. LEC's are vul- 
nerable because where .:x)mpetitors are collocating is where traffic volume is highest. 

Therefore, as this study indicates almost 80 percent of the access traffic, is at risk 
even though collocation is present in only 14 percent of the offices. 

ROLL UP OF 9 COMPANIES REPORTING 

Number of collocation wire centers, 957; Total wire center, 6,818; Percent (Ms), 
14.0; Switched DSl equivalents in collocation wire centers, 132,666; Total switched 
DSl equivalents, 200,964; Percent (Vs), 66.1; Special DSl equivalents in collocation 
wire centers, 344,117; Total special DSl equivalents, 397,061; Percent (%), 86.7; 
Combined switched and special in collocation wire centers, 476,783; Total switched 
and special DSl equivalents, 597,755; and Percent (i°/n), 79.8. 

Senator Inouye. Thank you very much, Mr. McBee. Mr. 
Frischkom. 

STATEME?^ OF ALLEN R. FRISCHKORN, JR., PRESmENT, 
TELECOMMUNICATIONS INDUSTRY ASSOCIATION 

Mr. FRISCHKORN. Mr, Chairman and members of the subcommit- 
tee, I am pleased to appear here today on behalf of the Tele- 
communications Industiy Association. TIA's nearly 550 members 
collectively provide the bulk of the physical plant and associated 
products and services used to build and maintain and improve the 
telecommunications infrastructure in the United States. 

I am pleased to have the opportunity to present to you TIA's 
views with respect to the critical public policy issues raised by S. 
1086. TIA commends you, Mr. Chairman, Senator Danforth, and 
both your staffs, for having the courage, foresight, and energy to 
tackle the single-most important and challenging issue facing our 
industry today. As your bill recognizes, in order to ensure that our 
Nation's telecommunications infrastructure remains second to 
none, it is absolutely essential that we develop and implement a 
national policy whicn promotes competition in the provision of all 
telecommunication services. Without such a policy, our Nation and 
the American people will be denied the fiill benefits available 
through the use of advanced telecommunications technologies in 
areas such as education, transportation, manufacturing, health 
care, financial services, entertainment, and other equally vital sec- 
tors of our economy. 

Technological developments, regulatory initiatives undertaken 
over the past several decades, and the structural changes affected 
under the terms of the AT&T consent decree, have dramatically in- 
creased the level and scope of competition in virtually all sectors 
within the U.S. telecommunications industry. However, le^al and 
regulatory barriers continue to limit the ability of alternative pro- 
viders to fiilly enter and compete on a fair and equal basis in the 
local telephone service market. 

These barriers, together with the statutory and regulatory re- 
strictions on the provision of video services by local telephone com- 
panies, impose serious impediments, in our view, through the de- 
ployment of new technologies and systems that are capable of effi- 



71 

ciently delivering a broad range of services which cuts across the 
existing legal and regulatory boundaries. 

TIA believes that removal of these artificial barriers to competi- 
tion in the provision of all types of local telecommunications serv- 
ices; that is, voice, data, and video, will ^ield substantial benefits 
to consumers, the industry, and our Nation's economy as a whole 
in the form of lower prices, better service, increased innovation, 
and a more diverse and efficient array of products and services and 
service providers. 

The introduction of S. 1086 represents a welcome first step to- 
ward the establishment of a national policy which is designed to 
ensure that these potentially enormous benefits are available to 
American businesses and consumers alike. In particular, TIA 
would like to express its support for proposed section 229(a) in- 
cluded in section 5 of S. 1086, which provides for the elimination 
of State and local statutory and regulatory provisions "that prohibit 
or limit in a manner inconsistent with Federal regulations or with 
this act, the ability of any entity to provide interstate or intrastate 
telecommunication services" including local exchange and exchange 
access services. 

TIA also generally supports the imposition of interconnection re- 
quirements which will ensure that incumbent monopoly providers 
of local telecommunications services do not withhold access to "bot- 
tleneck" facilities that are essential to the ability of alternative pro- 
viders to enter and become viable competitors in the market for 
such services. 

In this regard, TIA recognizes that removal of explicit legal bar- 
riers to entry does not guarantee that meaningful competition will 
automatically develop in the provision of local telecommunication 
services. TIA therefore urges that careful attention be given to the 
need to strike a balance which recognizes and addresses the risks 
of anticompetitive conduct by the current monopoly provider of 
such services as alternative providers attempt to enter and compete 
in the local services market, while at the same time making provi- 
sion for appropriate relaxation of regulatory constraints on the in- 
cumbent provider when and where competition, in fact, emerges. 

In addition to supporting competition in the local telephone serv- 
ice market, TIA endorses the basic provisions contained in section 
8 of the bill, which would amend section 613(b) of the Communica- 
tions Act to eliminate the current restriction on the provision of 
cable television service by local telephone companies within their 
telephone service areas. In this area, as well, TIA urges the spon- 
sors to continue their efforts to develop a balanced, workable, pro- 
competitive policy approach that provides reciprocal opportunities 
for telephone companies and cable companies to expand the scope 
of their current operations under appropriate terms and conditions. 

Achieving a legislative consensus on these difficult issues will not 
be easy. But TIA strongly believes that the development of a sound 
national policy in this area promises to yield enormous dividends 
to our society for years to come. 

Thank you, Mr. Chairman, for the opportunity to appear here 
today, and I would be pleased to answer any questions you may 
have. 

[The prepared statement of Mr. Frischkorn follows:] 



72 

Prepared Statement of Allen R. Frischkorn, Jr. 

My name is Allen R. Frischkorn, Jr. I am President of the Telecommunications 
Industry Association (TIA), a national trade association whose membership includes 
nearly 550 manufacturers and suppliers of all types of telecommunications equip- 
ment and related products. lA's members are located throughout the United States 
and collectively provide the bulk of the physical plant and associated products and 
services used to Duild, maintain, and improve the telecommunications infrastructure 
in the U.S. In addition, TIA's-members are involved on an ever-increasing basis in 
providing telecommunications equipment and related products in other developed 
and developing nations around the world. 

I am pleased to have the opportunity to present t^you TTA's views with respect 
to the critical public policy issues raised by S. 1086, "The Telecommunications Infra- 
structure Act of 1993." TIA commends you, Mr. chairman. Senator Danforth, and 
both your staffs for having the courage, foresight, and energy to tackle the single 
most important and challenging issue facing our industry today. As your bill recog- 
nizes, in order to ensure that our nation's telecommunications inirastructure re- 
mains second-to-none, it is absolutely essential that we develop and implement a 
national policy which promotes competition in the provision of all telecommuni- 
cations services. Without such a policy, our nation and the American people will be 
denied the fiill benefits available throu^ the use of advanced telecommunications 
technologies, in areas such as education, transportation, manufacturing, health care, 
financial services, entertainment, and other equally vital sectors of our economy. 

Let me assure you that TIA shares your commitment to the promotion of "invest- 
ment, growth, and competition" throughout the telecommunications industry, sev- 
eral years ago, in response to a Notice of Inquiry issued by the Conmierce Depart- 
ment's National Telecommunications and Infonnation Adininistration (NTIA), TIA 
offered a number of recommendations for public policy initiatives to promote the 
continued advancement of the domestic telecommunications infrastructure. In its 
April, 1990 comments, TIA specifically urged that "the cornerstone of any efTort to 
configure a comprehensive public policy framework designed to spur the future 
growth and development of tne telecommunications infrastructure in the U.S. must 
be a continuing commitment to the promotion and preservation of open, competitive 
markets in which telecommunications manufacturers, equipment suppliers, and 
service providers are free to compete on a fair and ecjual basis." NTIA's October 
1991 Infrastructure Report generally concurred in this view, concluding that "[t]he 
soundest way for government to encourage efficient infrastructure development is 
through removal of unnecessary regulation and promotion of a competitive tele- 
communications marketplace." 

Technological developments, regulatory initiatives undertaken over the past sev- 
eral decades, and the structural changes effected under the terms of the AT&T Con- 
sent Decree (the Modification of Final Judgment or "MFJ") have dramatically in- 
creased the level and scope of competition in virtually all sectors within the U.S. 
telecommunications industry. Competition in the equipment manufacturing and 
long distance service sectors of the industry has resulted in substantially reduced 
prices, more rapid innovation, and a vastly expanded range of products and services 
tailored to meet the specific needs of American consumers and businesses. 

Until recently, it was generally assumed that the provision of local telephone serv- 
ice was a "natural monopoly." However, recent technological advances and market- 
place developments have combined to challenge this assumption. Still, whUe the 
FCC and a number of states have taken some significant steps to facilitate the 
growth of competition in the provision of inter and intrastate local access services 
and, to a mucn lesser extent, in the provision of certain local telephone services, 
legal/regulatory barriers continue to limit the ability of alternative pn)viders to fully 
enter and compete on a fair and equal basis in the local telecommunications service 
rnarket. These barriers, together with the current statutory and regulatory restric- 
tions on the provision of video services by local telephone companies, impose serious 
impediments to the deployment of new technologies and systems that are capable 
of efficiently delivering a broad range of services which cuts su;ross the existing 
legal/regulatory boundaries. 

TIA believes that removal of these artificial barriers to comp>etition in the provi- 
sion of all types of local telecommunications services, i.e., voice, data, and video, will 
benefit consumers, the industry, and our nation's economy as a whole. Consumers 
stand to reap substantial benefits in the form of lower prices, better service, and 
a broader range of products, services, and service providers. The telecommunications 
equipment and service sectors of the industry will also benefit from the new market 
opportunities created by competition in local service markets. Given the dramatic 
growth which the industry has experienced in other sectors where competition is al- 



73 

ready well-established, it seems reasonable to expect that market opportunities for 
new entrants and existing service providers will expand in a competitive local tele- 
communications environment. In addition, as TIA indicated in its last appearance 
before this subcommittee, the emergence of meaningful, market-based constraints in 
the Regional Bell Operating Companies' ability to abuse their monopoly power, as 
competition develops in the local telephone service markets which they now domi- 
nate, would provide a viable basis for the eventual removal of the current restriction 
on RBOC entry into the telecom manufacturing business, lore generally, creation of 
a competitive marketplace would reduce or eliminate the need for regulations de- 
signed to address the risks of anticompetitive behavior associated with the current 
monopoly environment, thereby reducing the overall cost of regulation at the federal 
and state level. Finallv, businesses in other industries, particularly those which are 
highly dependent on the use of telecommunications, will benefit from the cost reduc- 
tions and the broad array of new and improved services available in a fully competi- 
tive local telecommunications marketplace. Most importantly, they will have the 
ability to select the technologies and service providers that are most efficient and 
responsive to their needs. 

The introduction of S. 1086 represents a welcome first step toward the establish- 
ment of a national policy which is designed to ensure that these potentially enor- 
mous benefits are available to American businesses and consumers as quickly as 
possible. Accordingly, TIA strongly supports the purposes articulated in Section 3(2) 
and Section 3(3) or the proposed legislation, i.e., to "ensure the availability of the 
widest possible range of competitive choices in the provision of telecommunications 
and cable television services and to "eliminate the existing regulatory barriers to 
competition in the provision of telecommunications and cable television services." 

More specifically, TIA wishes to express its support for Proposed Section 229(a), 
included in Section 5 of S. 1086, which provides for the elimination of state and local 
statutory and regulatory provisions that "prohibit or limit in a manner inconsistent 
with Federal regulations or with this Act the ability of any entity to provide inter- 
state or intrastate telecommunications services." TIA also generally supports the im- 
position of interconnection requirements which will ensure that incumoent monop- 
oly providers of local telecommunications services provide access to "bottleneck" fa- 
cilities that are essential to the ability of alternative providers to enter and become 
viable competitors in the market for such services. TlA recognizes that certain as- 
pects of Proposed Section 229(c), which as introduced would extend interconnection 
obligations to other providers who arguably do not control "bottleneck" facilities, as 
well as certain other provisions contained in Section 5 of S. 1086, have proven to 
be somewhat controversial. TIA urges the sponsors and their staff's to work with the 
affected parties to address the concerns that have been raised with respect to these 
provisions in a manner consistent with the pro -competitive purposes oi the legisla- 
tion. 

In this regard, TIA recognizes that the removal of explicit legal barriers to entry 
does not guarantee that meaningfiil competition will in fact develop in the provision 
of local telecommunications services. Accordingly, TIA urges that careful attention 
be given to the need to strike a balance which recognizes and addresses the risks 
of anti-competitive conduct by the current monopoly provider of such services, as al- 
ternative providers attempt to enter and compete in the local services market, while 
at the same time making provision for appropriate relaxation of regulatory con- 
straints on the incumbent provider when and where competition in fact emerges. 

In addition to supporting competition in the local telephony market, TIA endorses 
the basic provisions continued in Section 8 of S. 1086, which would amend Section 
613(b) of the Communications Act to eliminate the current restriction on the provi- 
sion of cable television service by local telephone companies within their telephone 
service areas. TIA at this time defers further comment on the specific details of the 
terms and conditions under which telco entry will be permitted, with the exception 
of the anti-buyout provisions embodied in Proposed Section 613(b)(lXA), which TIA 
supports. In this area as well, TIA urges the sponsors to carefully review the con- 
cerns raised by the parties most directly affected by this proposal (i.e., cable and 
telephone service providers), and to make every effort to develop a balanced, work- 
able, pro-competitive policy approach that provides reciprocal opportunities for tele- 
phone companies and cable service providers to expand the scope of their current 
operations, under appropriate terms and conditions. Achieving a legislative consen- 
sus on these difficult issues will not be easy, but TIA strongly believes that the de- 
velopment of a sound national policy in this area promises to yield enormous divi- 
dends to our society for years to come. 

Before concluding my remarks, I would like to briefly address one other issue of 
considerable concern to TTA. As an ANSI accredited standard-setting organization, 
TIA is actively Involved in efforts to develop voluntary standards for the tele- 



74 

communications industry in a wide range of areas. There are currently more than 
1,000 individuals serving on more than 50 committees and subcommittees involved 
in TIA-sponsored standardsetting initiatives. Accordingly, TIA has an strong inter- 
est in ensuring the continued success of the current, industry-led standard process. 

TIA believes that generally speaking this process, which emphasizes broad-based 
participation in an open forum in which all participants have ample opportunity to 
articulate their views and to contribute to the development of a consensus view as 
to the appropriate standard, has served our industry and our country well. Forward- 
looking technical standards for teleconununications can best be written by the ex- 
perts who are working on a daily basis at the leading edge of that tecnnoloey. In 
most cases, those experts reside in the private sector. As a matter of principle, we 
believe that unwarranted government intervention in this process would pose sub- 
stEmtial risks to the continued growth and djmamism of the telecommunications 
manufacturing and services sectors of the U.S. economy. 

Certainly, government has a useful role to play in the standard-setting process, 
e.g., a participant in the formulation of standards that implicate the government's 
interest as a major user of teleconmiunications equipment and services, and as an 
interested observer in cases involving the development of standards that may affect 
the FCC's performance of its statutory responsibilities under the Communications 
Act (e.g., with respect to the allocation and use of radio spectrum). However, before 
permitting the government to assume a more active role in this process, care must 
be taken to ensure that 1) there is in fact a "problem" that clearly cannot be ad- 
dressed through the established, industry-led standards development process, and 
2) that the benefits of government intervention in the standardsetting process out- 
wei^ the potential costs. 

Section 6 of 5.1086 includes several provisions, contained in proposed Section 
230(dXl), which would require the FCC to take certain steps to "encourage" and "as- 
sist" the industry in developing standards to "ensure interconnection and interoper- 
ability of telecommunications networks," and would authorize the Commission to 
"establish" standards "when industry participants fail to reach agreement." While 
TIA is not opposed to government "encouragement" or "assistance" per se, we are 
concerned that the line between "assistance" and direct government involvement in 
the establishment of a standard is somewhat uncertain. Accordingly, we would urge 
the biU's sponsors and other members to consider at a minimum, including language 
that expresses a clear preference for industry-led standards development, with any 
form of direct or indirect government intervention to be considered only as a last 
resort in situations where the established process has clearly broken down, where 
there is a compelling need to establish a standard, and where it is clear that the 
benefits of government intervention outweigh the costs. TIA would be pleased to 
work with the sponsors of S. 1086 and other interested members to develop legisla- 
tive language which addresses TIA's concerns in this area in an appropriate fashion. 

In closing, I would again like to thank you, Mr. Chairman, and Senator Danforth 
for your efforts to craft legislation which secures for our nation the substantial bene- 
fits which can only be realized through the development of full and fair competition 
throughout the telecommunications industry. TIA looks forward to working with you 
and other members of Congress as the legislative process moves forward, appreciate 
the opportunity to appear before the Subcommittee and I would be pleased to an- 
swer any questions you may have. 

Senator Inouye. Thank you, Mr. Frischkorn. I have several ques- 
tions for all of the panel members. However, I will limit myself to 
one or two and, if I may, submit the rest for your consideration and 
response. 

So, Mr. Crowe, according to your testimony you already are com- 
peting rather successfully with the phone company. If that is the 
case, why do you need this bill? 

Mr. Crowe. We are competing in a very, very narrow range of 
services, Mr. Chairman, specifically access for large businesses. My 
friend from the USTA mentioned that we are — and this is a term 
that is often used — we are cream skimming, if you would, compet- 
ing for profitable services at the exclusion of less profitable serv- 
ices. I would tell you that the answer there is to let competition 
reign and see what happens. 



75 

Today, I would submit to you that most of the profits are in 
areas tnat we do not compete in. Today, we are not allowed to com- 
pete for the switched access that the gentleman mentioned. Today, 
we are not allowed to compete for intra-LATA long distance. They 
are monopolies. The areas where we compete are clearly the most 
competitive, and we would tell you probably priced below cost. 

The difficulty in all of this, I would think for you, is to determine 
whether in fact there are legitimate subsidies or whether the regu- 
latory structure is simply sm)sidizing 100 years of inefficiency. Are 
we subsidizing legitimate goals, or are we simply subsidizing costs 
that ought to be far less in a competitive environment? And I 
would tell you that the latter is our view. If you open up more mar- 
kets, that is, the other 99 percent of the local loop, we will bet the 
same kind of benefits we have seen in the narrow 1 percent we can 
compete in. 

Senator INOUYE. So, you want to get into the 99 percent? 

Mr. Crowe. We are working as hard as we can. Yes, sir. 

Senator Inouye. Thank you, sir. 

And now, if I may ask Mr. Roberts, if the Congress is successful 
in passing this measure, how soon can we expect to see companies 
providing competition for local exchange telephone service? 

Mr. Roberts. Our own company did a demonstration last year 
of the technology, which is obviously the first step. In September, 
we had a five- way conference call using an interconnection of cable, 
cellular, PCS where we had an experimental license in personal 
communications, and alternative access facilities here and in the 
United Kingdom. The five-way conference call did not use any local 
exchange facilities here or abroad, and the connections were per- 
fect. 

Our view on all of this is that there is not going to be a new net- 
work where somebody goes out and builds the whole country, but 
rather, already, a lot of the infrastructure is in place. Cellular is 
now available in almost all of America. Cable is in 95 percent. Al- 
ternate access is building a fiber highway. 

So, I think our answer would be it is coming very soon, probably 
within 2 years you would begin. The construction has been an- 
nounced by several companies to accelerate. There is a race on to 
come up with applications that will help fund this, things like 
home shopping which our company is involved with — such as QBC 
with Barry Diller — and some of the electronic retailing initiatives. 

So, I believe that there is great promise, and that this bill is of 
real importance because you will see an acceleration of such an in- 
frastructure with your support. 

Senator Inouye. Do you believe that PCS can become a competi- 
tive alternate to the telephone service? 

Mr. Roberts. I do not know that we know yet. We are a cellular 
company, as well, at Comcast. There are 50 million cordless phones 
today. And mine does not really work too well when you go from 
the living room to the kitchen. You get a lot of static as you get 
away from the base station. But there is a tremendous demand for 
an untethered telephone in your home. There are only 10 million 
cellular phones, just to put it into perspective. 

I think our view of what PCS could be is interconnecting with 
other carriers to provide maybe a local cellular service in your 



76 

neighborhood. Someday PCS could be more products than that, but 
that might be a targeted use because you have to build very many 
cells for PCS, and we think that that would be logical to do in local 
neighborhoods, interconnected perhaps by cable or alternate access 
facilities, and of course into the local switch network. 

Senator Inouye. I thank you very much, sir. If I may now ask 
Mr. Ware, Mr. Ware, we have listened to your testimony with great 
care, and so I wish to assure you that it is not the intent of the 
authors to disturb existing subsidy flows set by the FCC. In fact, 
we hope to give statutory backing to the FCC regulations. 

Now, if we are able to clarify that in this bill, would you still op- 
pose the measure? 

Mr. Ware. Mr. Chairman, thank you, and we do appreciate your 
concern and the concern of the other subcommittee members for 
the need to maintain universal service. 

To answer your question, we do have some other concerns in that 
the bill basically severely restricts the authority of the State com- 
missions, but then gives them the responsibility for universal serv- 
ice. So, with some crafting or recrafting of the language in the bill 
it possibly could be shaped to meet those concerns. 

We are concerned about the effect of the limits on the State regu- 
latory bodies and the direction to directly targeted support flows 
rather than the broader general support flows in place today which 
have done such a very good job. 

Senator Inouye. We will get together with you, sir. 

Mr. Ware. Thank you, sir. 

Senator Inouye. Mr. Coe, as a large user, would it matter to you 
as to who provides the network service? 

Mr. CoE. I think as a large user, indeed what we are looking for 
are alternatives. The largest component cost of credit card trans- 
actions is indeed the last mile, and we also have limited technical 
options in that area. So, we believe that providing competition 
there would lower the cost and give us some alternatives. 

Senator Inouye. So, you are hoping that competition will give 
you the lowest cost alternative? 

Mr. CoE. Absolutely, sir. 

Senator Inouye. Mr. Niggli, why can the phone companies not 
provide your company with energy management capabilities you 
need at this moment? 

Mr. Niggli. Well, there are two reasons, Mr. Chairman. 

Senator Inouye. Is fiber the only way you can do it? 

Mr. Niggli. Pardon? 

Senator Inouye. Is fiber the only way you can do it? 

Mr. Niggli. It may be from the standpoint of having the verifi- 
ability and the response rate that we need to ensure that we have 
response for the control actions that are taken. If you think about 
the energy management situation, our svstem operators have a 
choice when load is increasing on a hot day like today. They can 
push a button and call up a generator. 

Well, they need to also on the demand side be able to push a but- 
ton and bring down load for energy management. We have to have 
a feedback that says that has happened and those kinds of things 
have occurred and will stay off the line. Otherwise, we jeopardize 
some of the reliability of our system. 



77 

So, it is a speed-and-response issue right now that if we poll the 
large number of consumers that we believe will be on this system 
and all those responses come back, the network cannot handle it 
right now. 

Senator INOUYE. Thank you, very much. 

Mr. McBee, does your organization support the provisions that 
would permit telephone companies to get into cable? 

Mr. McBee. Yes, sir. 

Senator iNOUYE. And what is your position on separate subsidies 
for electronic publishing? 

Mr. McBee. Separate subsidiaries, in our opinion, have been 
dealt with very adequately by the FCC and recently by the appel- 
late court, and I believe even in the beginning of July of this year 
the FCC has strengthened the cost allocation rules. We think those 
are adequate. There have been virtually no complaints about cost 
allocation — an awful lot of discussion of it but very few complaints. 
So, we think they are not necessary. 

Senator iNOUYE. Do you have any thoughts on long distance 
waivers in the bill? 

Mr. McBee. I am sorry, sir? 

Senator Inouye. We have waivers on long distance here. Do you 
have any thoughts on that? 

Mr. McBee. No, sir. 

Senator Inouye. I see. Thank you, very much. 

Mr. McBee. If I might add one thing, Mr. Chairman 

Senator Inouye. Yes. 

Mr. McBee [continuing]. I did not use the term "cherrypicking," 
but the idea of the interexchange carriers and the alternate access 
providers moving into our central offices is demonstrated by a 
study that is attached to my testimony where they are in 957. They 
have asked for location in 957 offices of the local exchange carriers 
or collocation. Those 957 offices only represent 14 percent of all the 
offices in the United States, or at least that were in the study, but 
they have access to or they provide access to 80 percent of the ac- 
cess traffic. 

So, I do believe that there is a business demand that says you 
go after the most lucrative markets first, and I think that question 
was brought up earlier. That is what business is going to do, and 
I think that is what they are doing. 

Thank you. 

Senator Inouye. Thank you. 

Mr. Frischkom, has the manufacturing sector become more pro- 
ductive since the breakup of AT&T? 

Mr. Frischkorn. Yes, it has indeed become more productive. 
There are fewer employees putting out more equipment than ever 
before. Since the AT&T breakup, prices of products have declined, 
the quality of products have improved and variety of products has 
increased. We probably all remember 10 or 12 years ago when the 
rotary dial phone was standard. Now you have such a variety of 
options. So, all these things have been spurred in part by the com- 
petition that was engendered by the AT&T breakup. 

Senator Inouye. Now, if we are going to have the benefits of 
high technology for all of our users and consumers, it would take 



78 

the deployment of some network infrastructure. Do you have any 
idea as to how much that will cost? 

Mr. Frischkorn. Well, with respect to one segment of it, I have 
information. There are some estimates that having a fully oper- 
ational fiber optics network by the year 2035 will cost $450 biUion 

plus. 

Senator INOUYE. $450 bilHon. 

Mr. Frischkorn. $450 billion. Well, initially, that may seem like 
a big number. [Laughter.l 

That might seem like a big number even to you here in Congress. 
Let me say this — telephone companies spend roughly $20 billion a 
year on new equipment and cable companies somewhere over $2 
billion. That is about $22 bilHon. So, in 20 years telephone and 
cable companies will spend about $450 billion on the network. And 
that spending will increasingly be on new products and services. As 
those new products and services come on line their prices will de- 
cline. Of course, you probably all remember the VCR and the 
handheld computer. They were very expensive at first, but the 
more you produced and sold, the more the price declined. And that 
will happen also with fiber optics. 

One of our member companies. Coming, Inc., estimates that an 
interactive broadband network including fiber to the curb will be 
universally available around 2035 under a purely cost-driven sce- 
nario. However, if we want to accelerate the deployment of this 
network so that most Americans can be served within, say, 20 
years, an incremental cost will be involved. Coming estimates that 
incremental cost to be about $23 billion in 1992 dollars over the 
next 20 years. While that number seems high, the $23 billion could 
be easily recovered through the pricing of new services which are 
going to be coming on line. 

So, the bottom line is $450 billion may seem daunting at first, 
but it is not so daunting when you look at the overall economics 
of the telecommunications industry. 

Senator Inouye. Thank you, very much. 

Senator Danforth. 

Senator Danforth. Mr. Ware, my understanding of your position 
is that in the case of rural telephones companies, competition 
might not necessarily be beneficial to consumers. 

Mr. Ware. Mr. Chairman and Senator Danforth, yes, sir, that is 
our position. And I think it is very reasonable. When you approach 
the competitive environment you envision sharing markets between 
competitors. And when you come into the sparsely populated rural 
area and you try to share a 500 customer market, for example, the 
economies of scale are not there. You may not have either partici- 
pant viable once that happens. 

Senator Danforth. Now, other than Mr. Ware, do any of the 
other witnesses on the panel — and I thank each of you for being 
here — do any of you think that competition in local telephone serv- 
ice is an undesirable objective? 

[No response.] 

Senator Danforth. Do all of you believe it is a desirable objec- 
tive? 

Mr. Frischkorn. Yes. 



79 

Mr. McBee. If I might, Senator, I think it is a desirable objective 
but the decision as to how that services Hke in Mr. Ware's territorv 
can be maintained if, in fact, you have a very small business, small 
telephone company, one of your customers represents 30 percent of 
your income. The competition would more than likely come after 
that one customer and leave Mr. Ware with the balance of the cus- 
tomers and 70 percent of the revenue. 

So, I think that there are some considerations but we are not 
saying that it will not happen. I think it is less likely to happen 
in the rural areas, but if it did it could be disastrous for some of 
those companies. 

Mr. Ware. Mr. Chairman and Senator, if I might, as I indicated 
in my remarks that we are asking the committee to not mandate 
competition in rural areas at this time, but to rather defer and 
allow the State commissions to open up the local exchanges to com- 
petition when they feel there is evidence that it is viable and that 
consumers will not be injured by it. 

Senator Danforth. All right. Other than a possible concern with 
respect to — well, it is not a possible concern, it is a real concern 
from those who expressed it. With respect to small communities 
and rural telephone service, is it the view of this panel that com- 
petition is desirable in local telephone service? 

Mr. Roberts. If I might, I think if you look to the long distance 
market as a recent example of what happens. Our understanding 
is that rates have come down 40 percent, AT&T is healthier than 
ever, there are many competitors who are doing well, and the 
consumer has been the big winner. And the same is true in equip- 
ment, that we do not just have to buy the black rotary telephone. 
We now have fax machines and all sorts of devices that are easily 
purchased and the prices have come way down. 

So, I think you can look to that and say that if the whole net- 
work is competitive at all stages with open architecture and inter- 
connections, you are going to have a very robust, rapidly acceler- 
ated marketplace. 

Mr. Crowe. Senator, I might make a comment, too. I think some 
of the most lucid and carefully thought out argument's concerning 
the benefits of competition in the local loop have been submitted 
by the Bell companies over in the United Kingdom to their equiva- 
lent of the Federal Communications Commission. They make the 
argument, probably because they have a lot more lawyers, far bet- 
ter than we could. I would certainly commend those writings to 
anyone who is interested. They are very well drafted. 

Mr. McBee. Senator, if I might add, the person originally from 
Pacific Bell who made that comment, I wish he were here today. 
And as far as your term about desirable, that would not be my 
choice of words. I think it is inevitable, and I think this committee, 
the one thing you cannot do is to create legislation that would stop 
competition. 

Senator Danforth. But under the present situation, it is 
stopped. 

Mr. McBee. I understand that it is stopped, yes, sir, but it will 
not be over time. Just like every market gradually is being opened 
to competition. And our position is that that is going to happen but 



80 

you clearly have to understand the support flows that are nec- 
essary to provide universal service before unleashing that. 

Senator Danforth. Thank you all, very much. Thank you, Mr. 
Chairman. 

Senator Inouye. Thank you. Senator Burns. Oh, I am sorry. Sen- 
ator Packwood. 

Senator Packwood. Mr. Niggli, in your service area, I take it you 
serve both urban and rural areas? 

Mr. Niggli. That is correct. 

Senator Packwood. Is there cross-subsidization from urban to 
rural or from business to residential in the electric business? 

Mr. Niggli. That probably depends on which jurisdiction you are 
looking at. We have cost of service rates that we file. The last rate 
case we had in our service area was about 1985. So, it has been 
quite a while since we have had a specific rate case. 

Senator Packwood. Well, I do not mean as a specific rate case, 
as a matter of philosophy. In the old days the argument was we 
use long distance to subsidize residential use, business, to subsidize 
rural, phones and — do you have that in the electric business? 

Mr. Niggli. Yes. I believe you would find it in many of the State 
commissions. They have set it up so that certain classes are subsi- 
dizing others and we do not have a true cost of service. 

Senator Packwood. Do you by and large make money on resi- 
dential customers or at least break even on them? 

Mr. Niggli. We make money on residential customers, yes. 

Senator Packwood. OK, now, Mr. McBee, on page 7 of your 
statement you say absent this $18 to $21 billion subsidy, residen- 
tial consumers would be required to pay the full cost of their local 
telephone service. Why should they not? 

Mr. McBee. I think that the FCC are trying, in fact, to do that. 
Senator. 

Senator Packwood. Do you have any objection to them paying 
their own way? 

Mr. McBee. No, I do not have an objection to them paying their 
own way, if that were the only problem. The problem is that it is 
not just $12. I mean, assuming that everyone paid $12 more you 
would still have the problem of the urban areas at that point would 
be substantially providing support to the rural areas. And there- 
fore, you have a pricing structure in place in the urban areas that 
encourages competition because they are priced above cost, and the 
rural areas are at the same price, although if you eliminated the 
price subsidy, the real prices would go up substantially. 

Senator Packwood. Well, here, I am not thinking about rural so 
much as residential, because you are talking about a subsidy of $18 
to $21 billion residential consumers, so I assume you do not mean 
rural. You mean all of us living in the center of the city. 

Mr. McBee. No, sir, I mean residential customers or consumers 
in general. That may be poorly stated there, but it is customers in 
general, residential or home customers. 

Senator Packwood. Well, all right. But why should telephones 
be different than electricity? Unless you are saying that the tele- 
phone is more critical than electricity. 

Mr. McBee. Well, today I certainly would not say that because 
it is so hot. [Laughter.] 



81 

I am suggesting that the price differential between urban and 
rural is substantial; and if, in fact, we could say that every rural 
customer could in fact pay the cost of their service, that would 
probably be the best, economically efficient way to price. But I 
think it also then really runs in the opposite direction of universal 
service. I think a lot of people cannot afford it. 

Senator Packwood. I guess I am not getting my point across. I 
am talking about business versus residence, not urban rural. 

Mr. McBee. Do I think business customers should pay their fair 
share, their full amount? Yes, sir. 

Senator Packwood. Well, apparently in the electric business, Mr. 
Niggli manages to make money on residential customers; I do not 
know if he makes money on rural or not, but on residential cus- 
tomers in New Orleans. And yet, I sense that you are saying tele- 
phone customers are subsidized in these cities. 

Mr. McBee. What I am suggesting is that we make money on 
residential service also; but we made the money on residential 
service through those who are heavy users, not those who just sit 
there and have the telephone for emergency purposes. 

Senator Packwood. Well, that may be true of Mr. Niggli. My 
hunch is he may make more money on somebody with an air condi- 
tioner in New Orleans than somebody who does not have an air 
conditioner in New Orleans. 

Mr. McBee. Yes, that is correct, I would assume. But I am just 
suggesting that the competition for the long distance market, if, in 
fact, opened without appropriate mechanisms to support the rural 
communities, would create a problem. 

Senator Packwood. Do you agree with Mr. Crowe's statement, 
that the problem is inflated costs, and that is one of the reasons 
that if we had competition, the costs would go down? And regu- 
latory system lends itself to covering costs that are unnecessary? 

Mr. McBee. I think that is a bit of a misnomer. I have heard a 
number of times that the telephone companies are guaranteed a 
rate of return. What they are guaranteed is the opportunity not to 
earn more than a rate of return. Not to earn that rate of return. 
So, I believe that the efficiencies have been gained within the in- 
dustry over the last few years; we have all changed since 1982. 

I think the telephone industry is much more efficient than it was 
in those days; and I do not believe that it is, I do not believe it is 
a problem of inefficiency. I think it is a problem of past deprecia- 
tion rates, and the lives on some of the equipment that is in place 
today. 

Mr. Crowe. Senator, could I make one comment? Because I be- 
lieve there may be some confusion about the subsidy flows we are 
talking about. I know there is confusion; I am not sure anyone 
knows where they go to, or where they come from. 

But I think there is general agreement, and it goes directly to 
your point, that residential users of long distance are the source of 
the subsidy. It is not big business. Our customers most likely pay 
at or below cost. It is the residential user, making payments to 
AT&T, MCI, and Sprint, who in turn make payments to the tele- 
phone companies that are the sources of those subsidies. It is not 
big business; it is small users, it is residential users. 

Senator Packwood. By small users, you mean occasional users? 



82 

Mr. Crowe. I mean small business. 

Senator Packwood. But using a lot of long distance? 

Mr. Crowe. The folks who cannot affordf a telecommunications 
staff, the folks who cannot afford to go out and go through the dif- 
ficult effort of finding an organization like my own that can afford 
to deal with them on a custom basis. It is medium and small busi- 
ness, where all the jobs are created, and it is residential users, that 
provide the subsidy; if, in fact, that subsidy is real and not simply 
covering inflated cost. I guess we do not know the answer there; 
although I would point out that the average of American telephone 
companies' return on equity is now far higher than the average 
competitive American business. 

Senator Packwood. Mr. Roberts, let me ask you a question. As 
you know, I am a supporter of cable television; so the question is 
not malevolent. 

I read your statement, and I am intrigued with the marvels of 
fiber and everything that cable is doing. And, given its extraor- 
dinary advancements, why does my cable go out more often than 
my telephone? 

Mr. Roberts. That is a very fair question. It depends on your 
cable company. There are many reasons. But obviously, if some- 
body hits a telephone pole a mile away from your house, and it 
breaks the connection, and you do not necessarily pick up your 
phone that minute, you might not know it is out. But your TV's are 
on 7 hours a day, the average American TV set is on 7 hours a day. 
I do not think we use our telephone 7 hours a day. 

But I think a broader answer is that the cable industry is im- 
proving on service. There are now national customer service stand- 
ards. And I believe that the national customer service standards 
are the same as the models for the local telephone companies. 
There is no question, cable industry service has got to be at the 
same standard of excellence, or it is not going to be competitive. 
And what we are talking about here is allowing people the chance 
to compete. 

And in the United Kingdom, we are building a system as a cable 
company, and we are finding 20 percent of the telephone users over 
there want to buy our cable telephone products. 

Senator Packwood. And you were allowed entry in the United 
Kingdom, without restriction? 

Mr. Roberts. Yes. And, in fact, as was pointed out, so were the 
American telephone companies, who are over there as well. And 
they have said that, in order to create this level ballfield, we need 
to give time for this to nurture; but eventually, British Telecom 
will get into television, if that is what they choose to do. 

But the point is, we have had to learn how to give good service, 
or nobody is going to buy our products. And I think the market- 
place will ultimately force better service, and that is good. And I 
would like to submit for the record some more on that, if there is 
an opportunity to study what the actual outage ratios are — I do not 
know, off the top of my head — ^between one industry and another. 
But the perception may be higher because your TV is on all the 
time. And just a 5-minute outage is very annoying. 

So, we think we will bring our standards up very quickly. 



83 

Senator Packwood. I do know people who talk on the phone 7 
hours a day. Mr. Crowe, if you were given the opportunity, do you 
want to go into the business of serving high cost, rural areas; and 
consumer telephones, generally? 

Mr. Crowe. Well, I think I can answer that question, as a matter 
of fact. Our parent companies recently announced plans to acquire 
a rural telephone company. They are a for-profit organization, and 
obviously believe that that is a business that makes sense. 

My own company — I will step back and say, we are firm believers 
that with competition comes a necessary focus on customers. That, 
like any competitive business, the phone business will start to 
focus on customers, and organize around customers. 

Our focus is business; and we do not think that a single organi- 
zation can be everything to everybody at the start of a new indus- 
try and a new era. Our focus is business; that is where we plan 
to spend our time. But we do have an affiliate that is in that very 
industry. 

Senator Packwood [presiding]. Thank you, Mr. Chairman. 

I believe we are down to Conrad Bums, if I read this list right. 

Senator Burns. Thank you, Mr. Chairman. I appreciate that. 
Thank you for your excellent testimony, all of you today. And we 
have been wiggling around with this issue now for about 3 or 4 
years; it looks like, after a while, we would get it all ironed out and 
we would all understand it. 

Mr. Ware, I am interested in your comments. And by the way, 
I want to congratulate the rural telephones; because in my State 
you have been very cooperative, especially in distance learning and 
this type of thing. We have set up some terrific educational pods, 
and we are doing some things now with Indian reservations that 
has had a very positive effect on our State. And it has all been 
done through the creative thinking of cooperative and rural tele- 
phones. And so we appreciate that. 

I would, I want to ask you though, just for the matter of the 
record and how we would look at this: How would you identify 
rural exemption? Where do you draw the line? Whenever we start 
putting this into, and it is going to have a lot to do with how you 
operate, and how you deal with your local PUC's on rural exemp- 
tion. Could you give me a, where would we draw the line, and give 
me an idea? 

Mr. Ware. Senator, I do not know that I can give you the line, 
or the location to draw the line, as far as size or density. But there 
are some precedents out in the States, where they have exempted 
the telephone companies that they felt were rural and locally re- 
sponsive, and some of them have drawn that line at 50,000 access 
lines; some have drawn that line at other levels. 

So, I think that would need some research; but I would be very 
happy to provide some followup information for you. 

Senator Burns. And Mr. McBee, in your view on effective com- 
petition, that test for determining when telephone companies have 
provided greater freedoms from regulatory and legal situations. 
Would you want to comment on that, what level you think that 
would be? Can you identify what effective competition would be? 

Mr. McBee. I do not think that I can. I can tell you, though, that 
I believe that it would definitely vary by who the requested party 



84 

would be. If you wanted to look at effective competition in terms 
of how much of our access revenues are subject to competition, you 
could say we have effective competition there. 

I believe that you have heard testimony from Mr. Crowe that 
that is not the case; he has got, I forget what the percentage was, 
but a very low percentage of the market. 

If the intent is to wait until there is competition in each of our 
central offices, each of USDA's central offices, that is not likely to 
occur for a very, very long period. And the majority of those central 
offices currently will not have interconnection, nor do they have re- 
quests for them. So, I think it is a very difficult question to answer. 

Senator Burns. And give me, what kind of pricing reform do you 
specifically feel is necessary, if we in Congress are to make a policy 
decision to open local telephone exchanges to competition? And be 
as specific as you possibly can. 

Mr. McBee. There are a couple of things. I think the FCC again, 
several years ago, was on the right track in terms of trying to shift 
costs from the long distance service to the end user. And they 
wanted to do that in a systematic way, and there was — Congress 
did not like that, and held a number of hearings. And so that proc- 
ess was stopped. 

I think a process like that has to go on. I think the way that the 
other providers of service contribute to the maintenance of univer- 
sal service also is something that has to be dealt with, and it has 
to be in a way that the revenues from that source cannot be avoid- 
ed. 

Senator Burns. Do you see, Mr. McBee, do you see us redefining 
what universal service is, in the future? Do you see that changing? 

Mr. McBee, No, I do not. I see imiversal service being what it 
is today; but I expand that into saying that that is the service that 
would continue to receive some sort of a subsidy or a support. But 
in fact, all customers in the country ought to have access to more 
enhanced services; or at least, access to it at a price. 

Senator Burns. Mr. Roberts, I would ask you the same question 
I asked Mr. McBee. If you could define effective competition or the 
competition test for exemption to regulatory or legalese, we might 
say? 

Mr. Roberts. Thank you. Senator. First of all, I would want to 
state that the goal of NCTA here is to try to work constructively 
to find the solutions here; and so I do not have one answer that 
has to be the only answer. 

But I would perhaps say that in the Cable Act, it used a defini- 
tion that said, if 50 percent of the market is covered by a competi- 
tor, and 15 percent of the market is actually buying from the com- 
petitor, then there is effective competition. And that is the video ef- 
fective competition test that was just passed last year; so perhaps 
that is a starting place. 

Senator Burns. I am very interested. You know, last year when 
we did reregulate the cable industry under the guise that most of 
the service was not only part of that but, in other words, there was 
a great outcry because rates were continuing to grow on an acceler- 
ated rate. 

And the other day, if you do not think it is not costly, not only 
did our rates go up in cable, we also passed a little supplemental 



85 

appropriation of $11 million for the FCC just to write the rules and 
regulations, and to regulate the industry. So, instead of just cable 
users going to be paying this increase for regulation, everybody, 
whether you take cable or not, is going to pay for some of this. So, 
; I guess that pretty well tells you where I am coming down on this. 
I I tnank you for your testimony today, and we will be in 

Mr. Roberts. Can I just add to that point? I think that the goal 
of the Cable Act last year was that eventually we want an effec- 
tively competitive marketplace. The rules go away, that $11 mil- 
lion, whatever it is going to cost, is going to go away if there is ef- 
fective competition. And I think the goals of this bill seem to be 
thinking the same way, which is, if you can encourage competition, 
then down the road all these regulations ought to go away. The 
goal ought to be to get rid of regulations, when you have effectively 
competitive markets. And I think that is a very intelligent model. 

Senator Burns. I would ask the power company, Mr. Niggli, are 
there any Federal laws now that prevent you from pursuing your 
plan? And I would tell you that I am sort of interested in that. And 
State laws, are you asking the Federal Government to preempt 
State law? 

Mr. Niggli. Right now, there are no Federal laws that we are 
aware of that would keep us from implementing the power view 
concept, especially for demand side management applications with- 
in our industry. 

So, we are not aware of any that would preempt us, and frankly, 
one of the reasons that we are here today is to remind you that 
we bring an economic justification for these types of facilities; and 
we do not want to be preempted in the future from having the abil- 
ity to commimicate with our customers for demand side m£mage- 
ment purposes. 

Senator Burns. Thank you, Mr. Chairman. 

Senator Inouye. Thank you. Senator Exon. 

Senator ExoN. Mr. Chairman, thank you much. I want to thank 
all our witnesses. This has been a very fascinating and informative 
hearing. I will have some additional questions for the record. I 
want to ask Mr. Frischkom a question, then a question or two for 
Mr. Crowe. And then I will have additional questions for the 
record. 

Mr. Frischkom, I notice in your testimony on page 2, you state 
that your organization commends the sponsors of S. 1086 for their 
efforts to craft legislation which secures for our Nation the sub- 
stantial benefits which can only be realized through the develop- 
ment of full and fair competition throughout the telecommuni- 
cations industry. I agree with that. 

My question has to do with something that has not been ad- 
dressed here this morning, but I could not help passing up the op- 
portunity to ask you and the organization that you represent, as 
to another matter that is going to be facing the Congress in the 
very near future; and that is the North American Free Trade 
Agreement. 

I am surprised that some of you have not emphasized this morn- 
ing how important further telecommunications is in the United 
States of America. We obviously have not done a very good iob. 
There was a front page story in the New York Times the other day. 



86 

day before yesterday, I believe it was, that said that CBS and the 
New York Times did a poll of Americans. And 49 percent of the 
Americans had never heard, nor did they know anything about, the 
North American Free Trade Agreement. 

I thought that was a startling statistic. It shows me that we have 
an awful lot of entertainment, and a lot of information, but it must 
not be very precise, because if it is true in that poll, that one-half ^ 
of the people in the United States had never even heard of the 
North American Free Trade Agreement — which is something that 
we are going to be hearing from them on in the very near fiiture, 
and we are hearing from them on right now. 

But I want to get, specifically, and see if you could answer a 
question that is uppermost in many people's minds that are con- 
tacting my office these days, Mr. Frischkorn, and that is: When we 
have this expansion, when we have this explosion, which we are 
going to have, there is some concern that the North American Free 
Trade Agreement may force a substantial portion of the new jobs 
thus created to Mexico, or to other countries around the world, less 
developed countries, basically with reference to cheap labor rates. 

Can you tell me what your opinion is of this? What percentage 
of the manufacture of the firms that you represent is done in the 
United States today? And what percentage of the manufacturing 
jobs that will be created by this explosion in technology are likely 
to be in the United States? Or are we going to see more and more 
of these jobs being shipped elsewhere? 

Mr. Frischkorn. First of all. Senator, let me assure you that 
TLA as an association supports the North American Free Trade 
Agreement. We have been lobbying Congress and working with the 
administration on getting it implemented. It would provide a great 
deal of benefit to my member companies by opening up that huge 
new market in Mexico. I do not know if you have ever been to Mex- 
ico, but if you have you will know that their communication system 
is not as good as the system in the United States. And there is a 
lot of room for improvement, and that improvement can come 
through American products and technology. 

With respect to your question on the creation of jobs, there cur- 
rently exists under U.S. law provisions relating to customs duties, 
that have resulted in the creation by Mexico of the maquilladora 
program. Under that program, American companies can manufac- 
ture in Mexico, and ship the products back to the States, without 
incurring duty. A number of my companies, member companies, 
take advantage of that. 

So, I think the point is, to the extent that American companies 
have wanted to move production offshore to Mexico, or to other 
parts of the world, they probably have already done so. There is 
now no restriction on such moves. So, I do not see the North Amer- 
ican Free Trade Agreement as resulting in any loss of jobs from the 
United States. The Mexican market is so large, over 100 million 
people who need modem telecommunications equipment. Moreover, 
Mexico is on the same standard as the United States — the North 
American standard. So, I see every reason that the jobs that will 
result from an expansion of that market will most likely be in the 
United States. 



87 

That is not to say that there will not be some jobs moving down 
to Mexico. It does make sense, from a purely business point of 
view, to be close to your customer. So, American telecommuni- 
cations companies may want to establish manufacturing joint ven- 
tures in Mexico; enter into distribution arrangements in Mexico; or 
set up sales offices in Mexico. Clearly, there will be some jobs that 
move down there. But that is part of the territory. You cannot at- 
tack a market that big, without having local people to deal with the 
market. 

Senator EXON. You do not think we should be concerned, then, 
about the cheap labor market that is available to American indus- 
try in Mexico today, and certainly is expected to be available in the 
fixture? You do not think that is a major concern? 

Mr. Frischkorn. Well, there is no impediment to manufacturing 
there today, and so the NAFTA is not going to change that. If 
American companies had felt the need to go to a low labor area for 
whatever reason, they are already there. Again, I do not see 
NAFTA changing that. 

Senator ExoN. Mr. Crowe, let me turn to your excellent testi- 
mony. 

Let me ask you, because I am sure you have heard the concerns 
expressed by Mr. McBee and Mr. Ware and others, people sitting 
up here, with regard to rural America and the unfairness that 
might be created, or that we are fearful might be created. I am not 
saying it is going to be created. 

You and I in some conversations we have had previously on this 
matter have explored this matter in some detail, and you came up 
with what I thought were some rather interesting proposals that 
I do not believe are addressed in your written statement. Would 
you care to expand on some of the concepts and ideas that we 
talked about? 

You heard earlier, I made a statement with regard to, maybe, to 
help out the rural areas we could have an REA program, if not an 
REA program, maybe a low interest lending program as we have 
with REA, or some of the rural telephone companies, also the serv- 
ice to certain areas and certain individuals that maybe could not 
afford that. Would you care to expand on some of the conversations 
that we have had in this area? 

Mr. Crowe. Yes, Senator. First, I would start with the statement 
that I do believe that the definition of universal service needs to 
be looked at, and looked at hard, that otherwise we are in danger 
of becoming a nation of information haves and have-nots, which I 
believe is unacceptable, and my company has supported that since 
its inception, as have other competitors in the market. 

We have come down firmly and publicly in support of appropriate 
subsidies for those parts of America that do not have access to af- 
fordable communications. The only difference, I believe, between 
our position and that of the USTA is those subsidies ought to be 
out in the open. They ought not to be buried in an accounting 
structure that no one understands, that no one has any idea of 
what its ultimate impact is. It ought to be pulled out. It ought to 
be administered by a body like the FCC, and the necessary charges 
for that kind of a subsidy ought to be levied on all industry partici- 
pants in a way that is competition-neutral. 



88 

With respect specifically to the rural parts of America, I think 
that all of what is going on needs to be viewed as a process, not 
an event, and it is very dangerous to preconclude where that tech- 
nology revolution will take us. 

We have quite a number of technologies in the wireless area 
which eliminate much of the problem with distance when it comes 
to providing modern new services, so one ought not to prejudge the 
incredible pace of technology and the benefits it can bring. To have 
done that at the beginning of the computer industry would have 
eliminated many of the benefits we see from that industry today. 
No one had the imagination to understand where we would be 
today 10 years ago. We think the same is true in the communica- 
tions industry. 

So, I think it needs to be viewed as a process, and an impartial 
body like the FCC has to have the authority to raise and target 
necessary subsidies to avoid a Nation of information haves and 
have-nots. 

Senator ExoN. Are you then saying, Mr. Crowe, that you recog- 
nize — and I see most of the people seated at the table shaking their 
heads on the statement you have been making. The Federal Com- 
munications Commission is another one of the bureaucracies that 
costs a great deal of taxpayers' money to operate. You all seem to 
feel that regardless of what we do we are going to have to have 
some kind of regulation of the industry by an agency of the Federal 
Government, and I suspect that the Federal Communications Com- 
mission or something like it would be the logical body. 

I go back to the situation that I referenced previously in this 
area, and that is that we have a regulation and examinations of 
our financial institutions. Some past histories have indicated that 
we have not had as good an examination as we should have had, 
but in any event, the banks and the financial institutions pay a fee 
when they are investigated, and by and large that offsets much of 
the expense of the regulatory functions that the law provides as 
necessary for the common good. 

Would you feel that the industry as a whole, and you certainly 
can speak for your company, but would your company, and in your 
view the — as a whole the industry support some type of a basic fees 
that would be paid by the industry for the enforcement of the regu- 
lations that the bill before us suggests, or something like it, would 
put in place? 

Mr. Crowe. Senator, we have 100 years of regulation which all 
parties agree have greatly distorted the signals and cues that come 
from the marketplace, and the structures of the industry. That is 
not going to be fixed in 6 months. It is going to take a period of 
time. 

It is going to have to be administered by a technically competent, 
impartial organization. I believe the FCC is in the best position to 
do so. It is going to cost money, and we would support competition- 
neutral levies to fund an organization like the FCC's efforts. 

As far as the industry as a whole, I am not even going to try to 
guess if there would be consensus on that. It is getting too hard 
to define what industry as a whole is any more. 

Senator ExoN. Mr. Roberts. 



89 

Mr. Roberts. I would like to just echo that. Speaking for the 
NCTA, we wholeheartedly support this idea in terms of recognition 
that universal service is important and there is an obligation on 
anybody that wants to compete to pay your fair share, and I think 
Mr. Crowe has given some terrific suggestions, as you pointed out, 
and this could be shaped by the FCC, and people have to pay their 
fair share. 

Senator ExoN. Mr. Ware. 

Mr. Ware. If I might just comment. Senator — Mr. Chairman, the 
subsidy or support flows have been characterized as some hidden 
mechanism, and I guess I would like to take issue with that, be- 
cause I believe the FCC has a very good handle on the mechanisms 
for the support flows that exist today, and knowing the scope of 
those flows, and so I do not believe it is the hidden process that 
it has been characterized as. 

If I might just go on, I think also there have been comments indi- 
cating that some new pressure such as competition is needed in 
order to have the exchange carriers focus their efforts and atten- 
tions on the customers, and I think that is a mischaracterization, 
because I believe we do that very well, and recently our company 
surveyed our customers and overwhelmingly the response indicated 
that our service was good to excellent. 

So, I think while there may be some merit in these observations 
that have been offered, they should not be applied in blanket fash- 
ion to all of the participants or all of the carriers. 

Senator ExoN. Gentlemen, thank you, and thank you, Mr. Chair- 
man. 

Senator Inouye. Thank you. Senator Pressler. 

Senator Pressler. Mr. Chairman, I shall be fairly brief in view 
of the fact that some of my questions have been asked, but let me 
ask a question of anybody, any volunteer. 

As you know, S. 1086 permits all telephone companies to provide 
cable television service within their telephone service areas and 
rural telephone companies are allowed to provide cable. 

Now, many of the RBOC's are already investing heavily in cable 
systems outside their service areas in this country and overseas. In 
fact, I visited one of NYNEX's cable TV activities in Portsmouth, 
England, sometime ago. 

Now, those telephone companies currently are permitted to pro- 
vide common carrier transport of video programming and other 
nonownership relationships. However, they cannot have more than 
a 5-percent interest in programming. Some argue the telephone 
companies must have the opportunity to own programming before 
they will invest in upgrading the networks. Is this incentive nec- 
essary, and why would a telephone company invest abroad or out- 
side its regions and not in its own back yard? 

Mr. Crowe. Senator, I might take a quick shot at the latter part 
of the question, are those incentives necessary, and I would simply 
point out that for a number of years I believe it is accurate to say 
the phone business in the United States, the local phone business, 
invested about depreciation. 

The excess cashflow spilled over into every business but the one 
that was understood by the participants — overseas real estate, 
banking, et cetera. 



90 

Recently, within the last 2 years, U.S. West, Bell South, 
Ameritech, Bell Atlantic, and others have announced multibillion 
dollar programs to upgrade their facilities — $2, $5, $13 billion in 
one case — without any regulatory change, without any prompting, 
and I would submit to you it is the result of competition and the 
fear of competition. 

Mr. McBee. Senator, I would just like to add that I think that 
a restriction on competition is inconsistent with opening the mar- 
ket, and I think incentives, or the opportunity to provide the pro- 
gramming, is consistent with a competitive marketplace. 

Mr. Roberts. I would just quickly sav that what is — ^if you just 
say, open up all the markets, and gee, that seems like a logical so- 
lution, you have to remember, as I am sure you do, that there is 
an essential facility for all of us who want to compete in telephone, 
which is the public switched network, and what the United King- 
dom did in their Portsmouth example is they gave access at com- 
petitive rates to interconnection facilities, and it is that kind of en- 
couragement that is necessary. 

I also listened earlier to testimony that talks about $450 billion 
to build out fiber, and again, I for one look at the whole size of the 
cable industry and the whole video marketplace as $22 billion a 
year. So, are we going after too much money here, and who is going 
to pick up the tab if it does not work? 

I think our proposal, as the cable industry, is something more 
like $20 billion in the next 5 years, and we think we get a great 
network that can compete, and then at that point it may be time 
to get rid of some of the common carrier regulations. 

Senator Pressler. Another question, S. 1086 would bar a tele- 
phone company from buying out existing cable companies in its 
own service areas unless permitted to do so by the rural exemption. 

I understand the rationale for this provision is to preclude one 
monopoly service provider from replacing another and stimulate 
competition. However, some areas may not have the economic base 
to support two competing systems. 

Some of the small cable operators in my State who are worried 
about their economic viability imder the new cable rules have com- 
plained that they will not be able to sell their systems to the most 
likely buyer, the local telephone company. 

I realize that a rural cable ownership exemption would address 
their concern in some situations. Nonetheless, there may be others 
where it does not, so the question is. Do you have any thoughts or 
concerns about this problem? 

Mr. Roberts. As I said in my testimony, we definitely feel that 
that is a very legitimate concern, and it is a daunting proposition 
given the size of the regional Bell operating companies, so it is not 
just a rural problem. 

I think that one could have a model that said the FCC has to 
protect consumers in certain markets where there is not competi- 
tion and it does not need to be as regulatory in markets where 
there is competition, but I do not think that the bill should com- 
pletely just prejudge this issue. We would suggest instead to defer 
it. 

If you have strong regulations in instances where this might 
occur, it addresses some of the antitrust issues you kind of alluded 



91 

to. I think that rather than prejudge where all this is going in 
terms of the technologies, it would be better to leave it with a regu- 
latory agency to consider it as we go. 

Mr. Ware. Mr. Chairman, Senator, it might be an area that 
should be explored as to raising the rural exemption, because as 
your comments indicated, there may be systems out in smaller 
communities, even though they are slightly above the existing rural 
exemption level, where the service would be improved and the con- 
sumers benefited by a purchase of that cable TV system by the 
local company, particularly if their facilities are antiquated and 
need to be rebuilt. 

We have heard a lot of conversation about cable putting in fiber, 
but there are a lot of cable systems that do not have fiber and do 
not have modem facilities and are looking at replacement. 

Senator Pressler. My final question is a practical one, and I will 
take any volunteers on it. My State of South Dakota recently was 
ranked as the best place in the country to locate a credit card busi- 
ness. Would this bill make it even better, and how? 

Mr. Crowe. My State of Nebraska is the second best. We have 
got a large credit card processing facility in Omaha, and I think it 
is for many of the same reasons. Both States enjoy a strong tele- 
communications infrastructure as a result in no small part of ihe 
defense buildups of previous decades. 

I think that the upgrade of the infrastructure eliminates what 
you might think of as the tyranny of geography in business today, 
allowing businesses to relocate away from small concentrated areas 
where employment and communications are adequate to the parts 
of the country like South Dakota that look attractive under that 
scenario. 

Mr. COE. Senator, I would like to say that we feel that the sup- 
port of the bill would indeed open up many areas across the coun- 
try that today are probably not viable locations to add credit card 
processing. If we move forward with S. 1086, I think there will be 
ample opportunity in ample locations. 

Senator Pressler. Mr. Chairman, I have some additional ques- 
tions for the record. I thank you very much. 

Senator Inouye. Gentlemen, thank you very much. You have 
been very patient with us and we will submit further questions to 
you if we may. 

Our final panel for this hearing consists of the following. The 
president of the Bell Atlantic Corp., Mr. James Cullen; president 
of Lebanon Publishing Co., representing the national Newspaper 
Association, Mr. Dalton C. Wright; the president and publisher of 
the Pottsville Republican, Mr. Uzal H. Martz, representing the 
Newspaper Association of America; the president of Comptel, Mr. 
James M. Smith; and the vice president and general counsel of In- 
formation Industries Association, Mr. Steven Metalitz. 

On behalf of the committee I wish to thank you for your patience 
in waiting all these hours, but I will be here until everything is 
completed, so your testimony will be well received. May I first call 
upon Mr. Cullen? 



70-334 0-94-4 



92 

STATEMENT OF JAMES G. CULLEN, PRESmENT, BELL 

ATLANTIC CORP. 

Mr. CuLLEN. Thank you, Mr. Chairman. I do appreciate the op- 
portunity to be here this afternoon to testify on Senate bill 1086 
on behalf of the seven regional holding companies. 

First I would like to recognize your leadership, that of Senator 
Danforth, and the subcommittee in addressing these extraor- 
dinarily complex telecommunications issues. 

I know it does seem like we have been debating these issues for 
at least two decades now, and probably in fact we have. Certainly 
at this point there is not much to be said that has not already been 
said before somewhere sometime. And the frustration led earlier 
this morning to Senator Breaux observing that perhaps we should 
just let everyone into everything, and perhaps that is a worthwhile 
objective although I think we do need to recognize that competition 
inevitably will drive prices to costs, and that has serious implica- 
tions. 

However, I do think it is fair to say that everyone here today 
would agree with the primary goals of S. 1086 — to promote real in- 
frastructure development, to permit fair competition, and to protect 
the public interest. 

The problem here from an RBOC perspective is that the bill as 
written fails to promote all of these goals. In fact, in many ways 
it discourages them, and that is why we oppose the bill. 

However, I do want to say and be very clear that I am not here 
today to speak against increased competition in telecommuni- 
cations. Clearly, our industry is moving very rapidly toward full 
competition in all aspects of the business. We see it every day and 
we see it in particular in the profitable parts of our business. 

I am here, though, to address the important policy issues based 
on the facts of our industry and not the myths. One myth that I 
do see reflected in this bill is that the local exchange carriers are 
not investing enough in the telecomm.unications infrastructure, and 
that investment somehow needs to be jump started by injecting 
competition into the local exchange business. 

In fact, the local carriers are investing in a variety of new tech- 
nologies — investing more, in fact, that anyone else the industry. 
Since divestiture, for example, the regional companies have de- 
ployed roughly twice as much fiber optic cable as the long distance 
carriers. Bell Atlantic alone has deployed almost as much fiber as 
AT&T even though AT&T is three times as large. 

There is a second myth that I see reflected in the bill and that 
is that AT&T, MCI, Sprint, McCaw, and the cable companies all 
need to be protected from competition by the local exchange compa- 
nies. As this subcommittee knows and as your bill recognizes, the 
cable companies have no competition and customers nave been 
clamoring for it for years. To think that any of these billion dollar 
companies, cable or long distance, need any added protection from 
local exchange companies is ludicrous. 

When it comes to entry into the long distance business one con- 
tention we sometimes hear, and in fact heard earlier today, is that 
the regional companies can somehow discriminate against unaffili- 
ated long distance carriers. Among other things, this contention to- 
tally ignores the FCC-mandated carrier selection process put in 



93 

place at great expense in the 1980's which absolutely guards 
against any form of discrimination. Every RBOC customer, every 
customer, is free to select his or her long distance carrier, and no 
RBOC has any way to interfere with that selection. 

And despite the barrage of expensive TV advertisements, there 
really in fact is precious little price competition in the long distance 
market. In fact, over the last 3 years average prices of the three 
major long distance carriers have gone up while their costs of ac- 
cess supplied by the local exchange carriers, a very big part of their 
total costs, have gone down. 

As you can see in the Merrill Lynch report, which is attached to 
my written testimony, just 2 weeks ago the local exchange carriers 
reduced their access charges to AT&T by $250 million and AT&T 
passed along none of this reduction to its customers. In fact, as the 
Merrill Lynch report happily points out, this is another sign of 
oligapolistic tendencies in the long distance market. 

It is ironic that less than a week ago our President flew 6,000 
miles to Japan, urging policymakers there to open up markets to 
U.S. companies, while here in Washington, DC, my company, Bell 
Atlantic, is still trying to open up important American markets in 
long distance, in manufacturing, and in video services. 

By the way, these markets are open to telephone companies so 
long as the telephone companies are foreign owned. British Telcom 
ana Cable & Wireless, for example, are completely free to provide 
all these services in Washington, DC today with no restrictions. 

The RBOC's should be permitted to provide not only long dis- 
tance services but also video services and, of course, the manufac- 
ture of telecommunications equipment as approved overwhelmingly 
by the Senate in its passage of Chairman Rollings' bill last year. 

What the RBOC's are talking about here are real investments in 
new technology, in new services, American jobs, and at no cost to 
the taxpayers. And we simply want to do it right here at home. 

Thank you very much for the opportunity to appear here, Mr. 
Chairman. 

[The prepared statement of Mr. Cullen follows:] 

Prepared Statement of James G. Cullen 

Good morning. Mr. Chairman and members of the subcommittee, my name is 
James G. Cullen, and I am the President of Bell Atlantic Corporation. I am pleased 
to have the opportunity to testify on Senate Bill 1086 on behalf of the seven Re- 
gional Holding Companies("RHCs"). I also want to recognize the leadership and ef- 
forts of Senators Inouye and Danforth in addressing these complex issues. 

The principal purpose of S. 1086 seems to be to stimulate infrastructure develop- 
ment — a laudable goal because it holds the promise of improving our lives in the 
information age; improving global competitiveness; and creating jobs. Infrastructure 
development involves upgrading our distribution networks with fiber optic cables 
and other new technologies to carry more information; deploying digital switches to 
route traffic quickly and enhance transmission quality; and developing software sys- 
tems to provide new services and service capabilities. 

As drafted the RHCs oppose 8. 1086, not because we oppose local competition but 
because it fails to create the equitable competitive opportunities and regulatory par- 
ity needed to encourage farther infrastructure investment from the RHCs. While we 
recognize that our industry is moving toward full competition in all aspects of the 
business, the acceleration of that competition should be done in a more even handed 
way. 

The purpose of my testimony is two-fold. First, I want to make sure that this sub- 
committee separates the widely held myths about the local telephone companies 
from the facts. An understanding of the real facts will enable the subcommittee to 



94 

better assess what steps are really needed to encourage infrastructure investment. 
Second, I want to describe how S. 1086 can be improved to stimulate even more in- 
frastructure development while not destroying the incentives that already exist for 
the RHCs to invest in the network. 

I. THE RHCS ARE INVESTING FAR MORE IN INFRASTRUCTURE THAN THE LONG DISTANCE 

CARRIERS ARE 

The first myth which S. 1086 reflects is the assumption that infrastructure invest- 
ment by the RHCs lags behind investment in the infrastructure made by long dis- 
tance companies, and that this lag is due primarily to competition in the long dis- 
tance market. The plain facts, however, are that the RHCs already have deployed 
more fiber and made more infrastructure investment than all the long distance car- 
riers combined. 

For example, according to a recent FCC report, "Fiber Deployment Update-End 
of Year 1992," the regional RHCs had deployed 4.9 million fiber miles by the end 
of 1992 — roughly twice as much as the interexchange carriers, even though the an- 
nual revenues of the RHCs and the long distance carriers are approximately the 
same. Bell Atlantic's fiber deployment, for example, is roughly the same as AT&T's, 
even though AT&T is three times as large as Bell Atlantic. 

Moreover, while the interexchange carriers' fiber optic investment has leveled off 
to a mere 3 percent growth in fiber miles per year, the RHCs' fiber investment con- 
tinues at a healthy 25 percent growth per year. Also, the RHCs have recently an- 
nounced in a White House visit their willingness to invest up to $125 billion in the 
infrastructure by the year 2000. 

As I mentioned earlier, infrastructure development means more than just fiber 
optic deployment. The RHCs are also moving rapidly to replace old switches with 
digital ones that can process more information more quickly. In the past three 
years, the RHCs, have invested nearly $10 billion in digital switching capabilities. 
In addition, significant investments have been made to further upgrade our switches 
with a new network arrangement called 557 that speeds call delivery and provides 
easy access to information services. 

In sum, the myth that the RHCs are lagging behind the long distance carriers 
is wrong. The plain facts are that the RHCs far outspend the long distance carriers 
on infrastructure development. 

II. S. 1086 WILL UNDERCUT INCENTIVES TO INVEST IN INFRASTRUCTURE BECAUSE FT 
INCREASES THE RHCS' RISK WTTHOUT ALSO INCREASING THEIR OPPORTUNITIES 

The second mjdh I want to address is the notion that even-handed regulation will 
not work and that, therefore, the RHCs must be subject to market exclusions and 
other onerous restrictions in order to stimulate fair competition for new entrants 
and accelerate infrastructure development. These new competitors are not "mom 
and pop" carriers. Instead, the primary beneficiaries of the bill's entry provisions are 
large, well-entrenched carriers, such as AT&T, and large cable companies, such as 
TCI, Time-Warner, and Cox Cable, as well as foreign carriers such as British 
Telecom and Cable & Wireless. Given the financial resources of these types of com- 
petitors, there is no reason to impose new burdens that apply only to the RHCs. 
For example, the bill gives the RHCs very limited long distance relief, despite the 
fact that the long distance market already is supposed to be competitive. As a re- 
sult, the RHCs will only be able to provide local service, but our competitors will 
be able to provide both local and long distance service. 

Second, the bill places substantia restrictions on telephone company entry into 
cable and electronic publishing, but places no restrictions on entry by cable or other 
electronic publishers into the local telephone business. 

Third, the bill imposes substantial requirements on the RHCs to open up their 
networks so that other carriers can connect to them, but neglects to impose com- 
parable burdens on cable companies or on the dominamt long distance carrier, 
AT&T. 

There is no justification for these kinds of one-sided burdens and restrictions. If 
cable companies, which Congress has found to be unregulated monopolies, and dona- 
inant long distance carriers like AT&T are free to enter the local telephone busi- 
ness, then the RHCs should be free to enter the long distance and cable businesses 
on the same terms. 

It is very important to recognize that today there is a system in place for cus- 
tomers to choose a long distance carrier. That system has worked well in the past 
and will v/ork just as well if the RHCs are allowed to be another provider that cus- 
tomers can select as their long distance carrier. Since the RHCs will enter v,he long 



95 

distance market with zero market share, there is no possibility at all that they could 
hurt competition in this market. 

The RHCs have been doing their part to modernize the nation's telecommuni- 
cations infrastructure. But they cannot be expected to continue much less increase 
those efforts in the face of legislation like S. 1086 that increases their risk by sin- 
gling them out for special burdens and obligations. In creating competitive opportu- 
nities for the long distance carriers to compete in the local markets, the bill must 
address both the new opportunities for RHCs in the long distance maitet, as well 
as the regulatory obligations that should apply to long distance carriers in the local 
maricet. 

III. S. 1086 IS ALSO BASED ON THE ERRONEOUS ASSUMPTION THAT LONG DI^ANCE 
COMPETITION HAS REDUCED ORDINARY LONG DISTANCE RATES 

The third myth in S. 1086 is that it clearly assumes that long distance competi- 
tion and investment in fiber has lowered ordinary long distance rates. I know that 
you sometimes hear that competition has reduced long distance rates by 40 percent 
or more. The fact is that, while competition probably has reduced rates for the lare- 
est business customers who buy customized network solutions, the reduction in orm- 
nary long distance rates is more than accounted for by reductions in the rates that 
RHCs charge to long distance carriers for the local links used to complete long dis- 
tance calls. The FCC has noted, for example, that: 

[T]he single force most responsible for driving down long distance rates over 
the last several years has been the reduction of access charges long distance 
companies pay to local exchange carriers. — Policy and Rules Concerning Rates 
for Dominant Carriers, 4 F.C.C. Red 2873, 3054 (1989) 

Not only have our access rate reductions accounted for the reductions long dis- 
tance rates, but long distance carriers have failed to pass aU of these reductions 
through to consumers, as one would expect in a truly competitive market. For exam- 
ple, since 1984 AT&T's annual access charges have been reduced by approximately 
$10 billion. AT&T's annual rates to its own customers, however, have been reduced 
by only $8 billion. The remaining $2 billion has remained with AT&T. This means 
that despite our success in cutting costs and reducing prices, the consumer does not 
get the benefit of those reductions. Instead, AT&T's shareholders get the benefit of 
those dollars to the tune of $2 billion annually. 

This lack of price competition in the long mstance mariiet has not gone unnoticed 
by industry analysts. Attachment A to my testimony contains a Merrill Lynch report 
noting that, in the most recent round of rate filings at the FCC, althou^ AT&T 
received access charge reductions of $250 million, it raised some of its long distance 
rates and made no rate reductions whatsoever. Also, Attachment B shows the lack 
of genuine price competition in the face of access charge reductions. 

rV. WHAT CONGRESS CAN DO 

It is clear that if we look at the facts and not the myths, in many states there 
are already incentives in place to promote infrastructure development. The chal- 
lenge then becomes how do we encourage additional infrastructure development 
that will mean new jobs and will lead to the development of new technology, while 
at the same time ensuring fair competition. To meet this challenge, we recommend: 

• Remove the long distance restriction in its entirety. 

Both the Department of Justice and AT&T agreed at divestiture that the long dis- 
tance restriction should be removed when long distance carriers were permitted into 
the locsd exchange market. If this bill permits long distance carriers to compete in 
the local market, fair competition demands that the RHCs be able to compete in the 
long distance maricet. 

In addition to the obvious fairness of such an approach, there are other reasons 
to let the RHCs into the long distance market. The long distance restriction both 
limits our ability to provide modem networks that meet customer needs and im- 

f>oses unnecessary costs on consumers. There were supposed to be several processes 
or reconsidering these restrictions, but these processes have broken down entirely. 
There has been only one of the promised three-year reviews of competition in the 
industry despite the fact that divestiture occurred nearly ten years ago. Even minor 
waivers of the restriction can entail years of delay. 

If the RHCs are permitted into the long distance market, we will make it easier 
for consumers, especially residential customers, to deal with the increasingly com- 
plex long distance marketplace. For example, long distance relief would give us the 
ability to provide software services to help consumers select the long distance serv- 
ices to meet their individual needs. Today, long distance companies offer a wide va- 
riety of prices and service options — different rates for calls to different places, dif- 



96 

ferent rates on different days of the week or at different hours of the day. Maybe 
you've seen the Sprint commercial featuring Candice Bergen comparing long dis- 
tance rate plans to the blueprints for a nuclear submarine. As a practical matter, 
it is difficult for an ordinary consumer to figure out which carrier and service, or 
combination of carriers and services, is the best and the cheapest for his or her indi- 
vidual needs. Long distance relief would permit customers to choose from the var- 
ious long distance companies to find the best combination of services. Instead of 
being "locked in" to a single long distance carrier, consumers would automatically 
be able to take advantage of the best prices the competitors have to ofier. 

In sum, long distance relief would permit us to offer a wider range of services at 
lower prices to meet the needs of the customer. Long distance relief would give us 
the opportunity to offer additional services to our customers in our regions — the 
same opportunities now available to foreign carriers, such as British Telecom and 
Cable & Wireless, who are now operating in our territories. 

• Remove the video programming restriction immediately. 

The 1984 Cable Act bans the RHCs from providing video programming to their 
hometown customers. In 1990, this committee urged the FCC to consider whether 
this restriction should be retained. The FCC, after developing an exhaustive admin- 
istrative record, recommended that the ban be repealed. The FCC stands by this 
recommendation, even after Congress passed the 1992 Cable Act. 

The cable relief provided for in S. 1086 is several years away because it is contin- 

fent on several time-consuming, bureaucratic requirements. This restriction should 
e removed in its entirety immediately. 

• Remove the manufacturing restriction. 

Two years ago the Senate voted by a more than two-thirds majority to remove 
the manufacturing restriction. Surprisingly, this bill does not include that relief. 
The manufacturing restriction ties up the financial resources of seven of the nation's 
largest 35 corporations and severely limits the activities at Bellcore, one of the 
world's premiere telecommunications research and development organizations. 

The manufacturing restriction is an absolute bar to job creation. While companies 
with 60 percent of the telecommunications industry's assets watch from the side- 
lines, over 60,000 American manufacturing jobs have been eliminated and replaced 
with 20,000 foreign manufacturing jobs. As a result, the restriction necessarily slows 
the development of new telecommunications products and services and also puts 
this coTintry at a severe competitive disadvantage with our foreign competitors, none 
of whom handicap their telephone companies as this country does. This committee 
should again vote to eliminate this restriction. 

• Ensure consistent regulatory and universal service obligations on all providers 
of local exchange service. 

Although the bill is very clear about the need to remove barriers to entry into the 
local telephone market, it is silent on the need to ensure that all providers of local 
service are subject to consistent regulatory obligations, whether that means or less 
regulation. For example, the RHCs are obliged to serve all customers in their service 
areas, no matter how expensive it is. A similar universal service obligation should 
extend to all local service providers. Otherwise, the new entrants will take the most 
lucrative business and the leave the hi^ cost, low revenue customers to be served 
by the provider of last resort-usually the RHCs. Similarly, all local service providers 
should be required to provide operator services, 911 services, and equal access to 
all telecommunications providers. These are essential services that local customers 
enjoy today and have a ri^t to expect tomorrow from all providers. 

Finally, all providers of local exchange services should be required to support uni- 
versal service at affordable rates. This obligation should not be left entirely to the 
existing local exchange carriers. 

CONCLUSION 

Contrary to many of the myths that exist in our industry, the facts clearly show 
that: 

1. The RHCs are already making substantial investments in the nation's tele- 
communications infrastructure, outspending the long distance carriers by a two-to- 
one margin; 

2. That imposing one-sided burdens on the RHCs will lead to less infrastructure 
development and not more; 

3. Fair competition requires that all providers have the same access and obliga- 
tions in the same markets; 

4. The MFJ long distance and manufacturing restrictions that hamper further the 
RHCs' ability to compete, reduce consumers' costs, and provide new IJ.S. manufac- 
turing jobs should be eliminated; and 



97 

5. The video programming restriction imposed by the 1984 Act should be elimi- 
nated. 

Thank you again for this opportunity to appear before this subcommittee and I 
will be available to answer any questions you may have. 



[Attachment A — Merrill Lynch Telecom Services may be found in the committee's 
files.] 



Price/Minute* 

$ 

0.200 



ATTACHMENT B 

Price Comparison in th« U.S. 
Long Distance Market 



0.183 



0.167 



0.150 



Price capr 
started tar ATST 
Juty 1,1989 



v.. ......... 



> f 



.......................^ 



AT&T 
Sprint 

MCI 



1/1/89 7/1/89 1/1/90 7/1/90 1/1/91 7/1/91 1/1/92 7/1/92 1/1/93 

Average 

Exchange 

Access .w.iM 

Ch^ge .0788 .0642 .0618 .0583 



.0540 



'Based on the average price per mmuta tor basic kmg distance 
Source: Business CommunicBlions R«ia«, Februrary 1993 

Senator INOUYE. Thank you very much, Mr. Cullen. Mr. Wright. 

STATEMENT OF DALTON C. WRIGHT, PRESmENT, LEBANON 
PUBLISfflNG CO., REPRESENTING THE NATIONAL NEWS- 
PAPER ASSOCIATION 

Mr. Wright. Mr. Chairman, my name is Dalton Wright. I am 
from Missouri. I am the president of Lebanon PubHshing Co., and 
publisher of a small daily newspaper, the Lebanon Daily Record. 

I serve on the board of directors of the National Newspaper Asso- 
ciation. I am also, Mr. Chairman, a member of the Missouri Press 
Association, which has endorsed my comments today, so I will 
speaking on their behalf as well. 

Two distinguished members of the National Newspaper Associa- 
tion in the room today are Chairman Frank Garred, publisher of 
the Jefferson County Leader of Port Townsend in the State of 
Washington, as well as Jack Fishman, chairman of the Govern- 
ment Relations Committee, President of Lakeway Publishers Inc., 
Morristown, TN, and Publisher of the Citizen Tribune in Morris- 
town. 



98 

I am going to depart, Mr. Chairman, from my prepared text. I 
have taken some notes this morning and I am going to try to be 
more brief and possibly more to the point. 

First, I think that Mr. Chairman and Senator Danforth have pro- 
duced a very fine bill, one that would move our Nation closer to the 
dream of a national telecommunications infrastructure. It will 
bring great benefit to us all. 

Second, it does pain me personally that the National Newspaper 
Association and its 4,600 members cannot support the bill at the 
present time because of the lack of protection for small information 
providers, including both newspapers and broadcasters. This pro- 
tection we seek will ensure that they can in fact stay on the infor- 
mation highway, and can stay and maintain a viable part of the 
commimities they serve. 

Third, I am extremely proud that Senator Danforth is an archi- 
tect of this legislation. We in Missouri, and I personally, know him 
to be a man of great integrity and great ability, and I am confident 
that with his help we can resolve our concerns. 

Fourth, I would like to thank Senator Bums. He is showing great 
courage in picking up the cause for small information providers 
and carrying it forward fearlessly. 

Fifth, I would like to point out that the protection we seek comes 
down to very simplv two issues. One, access for services or facilities 
if they are limited by technological or other means, and second, the 
guaranteed lowest rate given to any information provider regard- 
less of size. These are the only two things that we really seek. And 
let me just take a minute to give you a few reasons why. 

We need guaranteed access. And if you will, sir, if there is a 
screen that has a potential for 20 providers, and if the local infor- 
mation provider is not on that screen, we are effectively left out of 
the loop without a way to participate or to compete. Also, if we 
happen to be No. 21 on a screen of 20, it will be similar to what 
occurred in the airline industry, that I am sure you all are aware 
of, where computerized reservation systems ran into problems. 

Concerning rates, we are asking that if the big national informa- 
tion service providers get volume discounts, that the small local 
provider get the same rate so his prices are not undercut by the 
big guy which, believe me, would have a very negative impact on 
our ability to serve those communities that we live in. 

I know there is a lot of language, and very good language, about 
nondiscrimination, but that really is not the issue that brings me 
here today. The nondiscrimination issues will not take care of our 
major concerns of access and rates. 

Sixth, this is not a g^rab for favoritism. I know that a lot of people 
feel that may be the case, but we are not asking for anything that 
one or more of our competitors will not already have. 

Seventh, Congress has traditionally had a concern for protecting 
small, local providers against sudden technological change, particu- 
larly in communications policy. We are asking that Congress con- 
tinue to protect localism as a central goal in its telecommunications 
policy. 

Eighth, the reason Congress has shown this concern in the past 
is that small, local information providers are not only vulnerable, 
they are also very valuable. They perform an essential consumer 



99 

service. Through them neighbors learn about neighbors. They learn 
to care for their neighbors. 

Without a local newspaper a community is much less a commu- 
nity. I could also say without local broadcasters a community is 
much less a community. The National Newspaper Association 
members serve more than 30 million households in thousands and 
thousands of large and small communities around the Nation, 

Ninth, what we are asking for would impose no significant bur- 
den, in that there will not be a lot of local providers clamoring for 
access. We see it more as an evolution on the local level rather 
than a revolution. Even with this protection they will be slow in 
entering the information services market. As small providers nei- 
ther the rate nor the access provision would impose any hardship 
on the telephone company, and certainly in no way cause any prob- 
lems for the large national information service providers. 

Tenth and last, I think it was Tip O'Neill that said that all poli- 
tics is local. The same could be said for news, information, and ad- 
vertising. What we publish is local and that is what makes it im- 
portant to us, to our friends and neighbors, and important hope- 
fully for the Congress of the United States to protect. And I ask 
you to do that by including the Bums amendment or similar lan- 
guage in this significant and much needed telecommunications leg- 
islation. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Wright follows:] 

Prepared Statement of Dalton C. Wright 

Mr. Chairman, members of the Subcommittee, my name is Dalton C. Wright, and 
I am pleased to be here this morning representing the National Newspaper Associa- 
tion (NNA). I am president of Lebanon Publishing Co., of Lebanon, Missouri, and 
publisher of the Leoanon Daily Record. I serve on the Board of Directors of the Na- 
tional Newspaper Association and I am also a member of the Missouri Press Asso- 
ciation, which joins me in this statement today. 

With me here today is Frank W. Garred, Chairman of the Board of Directors of 
the National Newspaper Association and publisher of the Port Townsend Jefferson 
County Leader of Port Townsend, Washington. Also joining me is R. Jack Fishman, 
president of Lakeway Publishers Inc. and publisher of the Citizen Tribune of Mor- 
ristown, Tennessee, who is a Director of the National Newspaper Association and 
Chairman of its Government Relations Committee. 

I would like to thank the Subcommittee for inviting us to testify this morning and 
for taking the time to consider our concerns. We applaud the Subcommittee and its 
staff for being aggressive on the issue of crafting fair and competitive public policy 
that will shape this country's telecommunications infrastructure. We are extremely 
pleased to see a commitment to bringing effective competition to local telephone 
service and maintaining safeguards on the telephone monopolies until the day com- 
petition really takes root. We join others on this panel in urging this Subcommittee 
to move vigorously toward strong safeguards. 

We are here today to ask the Subcommittee to do two things: 

• First, that Congress continue to include "localism" as one of the central tenets 
of national telecommunications policy; and 

• Second, to give assurance that local newspapers and broadcasters, as small, 
local information providers, will receive statutorily guaranteed access to facilities or 
services and rates equal to the lowest rates that are provided to large, national in- 
formation providers. 

The National Newspaper Association is a national trade association representing 
more than 4,600 small community newspapers throughout the United States, in- 
cluding almost 700 dailies and nearly 4,000 weeklies. Most members are community 
newspaper publishers such as myself. Our members concentrate on the news of 
their home town — what is happening in county and town governments, school 
boards, local universities and local businesses. Our social pages cover school events 
and church festivals. Our sports pages cover high school and local college games. 



100 

Advertising in our papers is done bv local retailers, whose economic survival de- 
pends upon their friends and neighbors in their own communities. Our editorial 
pages focus on matters of local interest. Few, if any, local bond issues, public works 
projects or local elections pass without extensive coverage by our members. From 
engagements and births to deaths and obituaries, our news is local news. Like the 
local clergy, we hatch 'em, match 'em and dispatch *em. In our papers, regular peo- 
ple are as important as Hollywood stars. 

Small newspapers also serve a very important social role in American society, for 
our members are generally the focal points around which our country's communities 
build and maintain their identities and their sense of communal self. We play a par- 
ticularly important role in rural areas for we are the institutions that mamtain a 
sense of identity and social cohesion in rural towns and villages. When a rural town 
loses its local newspaper, the town frequently loses its identity, and often shrivels 
up and dies. 

When considering public policy afTecting media, it is often common to conjure up 
an image of very large newspaf>ers, television jpersonalities and magazine publish- 
ers, but it is tremendously important to consider the impact of public policy upon 
thousands of members like ours. In shaping our nation's telecommunications infra- 
structure, one cannot ignore, either in the maricetplace of ideas or in the market- 
place of advertising, the thousands of local publications that exist throughout the 
country — publications that reach more than 30 million people every week. 

The Inouye-Danforth bill (S. 1086) to promote a national telecommunications in- 
frastructure represents, in many ways, a positive legislative response to the rapidly 
changing business and technological environment for the dissemination of informa- 
tion in our society. Yet, the proposed legislation is deficient in one crucial respect: 
it does not assure that local information services — ^that is community newspapers 
and local radio and television broadcasters — wiU be able to serve their communities 
by means of the new infrastructure. 

The need to preserve local information sources should be self-evident. Many of to- 
day's societal problems and their consequences — crime substance abuse, mental ill- 
ness, child neglect, welfare dependence, to name but a few — have sadly become hall- 
marks of our high-tech, depersonalized society, particularly in urban centers where 
truly local information services are not widely disseminated. It is difficult for most 
people to care about their communities — or their neighbors — if they have no idea 
what is going on in their own neighboriioods. 

Tip OT^eilTs famous maxim that "all politics is local politics" also applies. Where 
there is little media coverage of local government issues, there is little public aware- 
ness, low voter turnout, and unresponsive government. The success of our democ- 
racy depends on citizen involvement. In the first instance, that involvement is in 
the debates played out in our neighborhood communities, our town councils, our po- 
litical parties' local caucuses, and in local petitions, referendums and initiatives. 
Local inforrnation services meet the need for information to spur citizen involvement 
in community events and issues. Local publishers and broadcasters should be al- 
lowed to continue to play this important role. 

The United States today stands at the threshold of the much -discussed "informa- 
tion age," which will most Ukely be marked by the convergence of communications 
and computer technology and the replacement of the term "^lephone service" with 
^telecommunications service." However, we don't know what the fiiture of electronic 
information dissemination is going to be. We can see fascinating glimpses of it on 
the horizon as we read of new technologies and new concepts of communicating in- 
formation to the public. Nevertheless, we don't reaUy know what lies ahead and this 
is why it is so important for Congress to provide a regulatory framework for tele- 
communications that will insure competition and flexibility as we move to the fii- 
ture. 

The telecommunications infrastructure, on which a modem information services 
market depends, is transforming itself into a national market. Within that national 
market, the firms that have nearly unlimited access to homes and businesses, i.e., 
telephone and television cable companies, wiD be the dominant players. A national 
information services market, offering near-instantaneous, interactive access to vir- 
tually all sources of information, up to and including full-motion video program- 
ming, will be built upon this infrastructure. 

Informative coverage of local news and community events is simply not the focus 
of national or even regional or metropolitan media outlets, nor should it be. Commu- 
nity newspapers are unique because our job is collecting information that no one 
else collects. Throughout the country community newspapers are the basic assem- 
blers and publishers of local information. Community newspapers are subsequently 
in a unique but very vulnerable position with respect to new telecommunications 
technologies. We are vulnerable because we're local in scope and small in size. If 



101 

appropriate regulatory mechanisms and policies are not in place, we can be 
squeezed out by larger, nationally-based providers. 

We are equally vulnerable because the assumption is often made that all potential 
providers will be able to gain access to the network of the future. S. 1086 includes 
a general nondiscrimination provision that has a premise that access will be avail- 
able to all. For the foreseeable future, however, access will be limited functionally 
in a variety of ways, but primarily technological and financial. The large Bell oper- 
ating companies and other telephone companies with a monopoly over the local tele- 
ghone loop will be developing and managing these electronic information networks, 
ecause the Bells control the infrastructure, local providers face threats not only 
from Bell-owned information services but from deep-pocketed private providers who 
can strike lucrative deals for low rates and prime access. 

Any legislation concerning the telecommunications infrastructure must contain 
protection for equal rates and guaranteed access for local information providers, if 
our local communities are to preserve the quality of life that community newspapers 
provide. 

The National Newspaper Association has been working to have the concept of "lo- 
calism" included in telecommunications policy and we seek assurance that local 
newspapers and broadcasters, as small, local information providers, will receive 
guaranteed access to facilities or services and rates equal to the lowest rates that 
are provided to large, national information providers. The National Newspaper As- 
sociation's localism initiative is sponsored by Senator Bums, whose proposed 
amendment to S. 1086 would provide for such guarantees while placing minimal 
burdens on telecommunications carriers. 

First, there is the issue of guaranteed access. 

The proposed Bums amendment calls for "guaranteed nondiscriminatoiy access to 
local information providers in any situation where the facilities or services are lim- 
ited by physical or technological barriers." This simply means that whenever infor- 
mation service providers are required to "queue up," local providers will be guaran- 
teed a place in the line. To take an example that is familiar from the computerized 
airline reservation battles, a screen menu on a telephone company "gateway" system 
might have space for twenty listings on its first screen. Local information service 
providers would be guaranteed some portion of those listings. This requirement is 
no different in principle from the 1992 Cable Act's requirements for a minimum 
number of leased access channels that can be used for local programming. Without 
this requirement, telephone companies — themselves monopolies — would likely re- 
ward their best customers — and themselves — with the most favorable listings, just 
as some airlines were thought to have given preference to their own flight listings 
in the computerized reservation systems that they control. 

Second, there is the issue of guaranteed equal rates. 

The Bums amendment requires "that a local information service provider may be 
required to pay a nondiscriminatory rate no higher than the rate offered to any 
other information provider in the market." Without this specific provision, a tele- 
phone company could offer volume discounts to its largest customers while charging 
higher rates to smaller, local information service providers. Such discrimination 
would likely be considered "reasonable" under applicable legal precedent and would 
thus be permitted under a general nondiscrimination provision. The result could be 
devastating for a local provider. 

As one example, a regional telephone company might offer discounts based on vol- 
ume commitments to a national information service provider, enabling that provider 
to pass through its lower costs to attract subscribers. This would undercut competi- 
tion from local information service providers, who would face higher communica- 
tions costs. Larger, non-local information service providers could thus "crowd out" 
local competition in targeted markets, such as advertising and buying services or 
home financial services. 

It's important to remember that the National Newspaper Association's localism 
initiative as embodied in the Bums amendment woula place minimal burdens on 
telecommunications carriers. The demand for nondiscriminatory access and service 
rates would be limited by the small size of the geographic areas affected and the 
relatively small number of local providers in each area, which would in turn be lim- 
ited by the same market forces that limit the number of local providers today. 

Finally, adoption of the Bums amendment would foster the goals set forth in the 
Inouye-Danforth bill's findings that "the national welfare will oe enhanced if com- 
munity newspapers are provided ease of entry into the operation of information 
services disseminated through electronic means primarily to customers in the local- 
ities served by such newspapers at reasonable, nondiscriminatory rates to such 
newspapers." 



102 

Without protection for equal rates and access, community publishers will not be 
able to support the legislation. There is much in S. 1086 that is important and valu- 
able — the safeguards contained in the bill significantly reduce the ability of the tele- 
phone companies to abuse their monopoly power — but we believe that local informa- 
tion providers don't have the protection they need to compete fairly in the expanding 
marketplace that this bill would encourage. 

We urge the Subcommittee to work toward ensuring that this nation's smedl rural 
communities have an advanced, accessible and affordable information infrastruc- 
ture, and that community newspapers — and other local information providers — re- 
ceive this statutory assurance ana protection so they will not be prevented from 
playing an important role in our nation's new information highwajrs. 

Senator Inouye. Thank you very much, Mr. Wright. Mr. Martz. 

STATEMENT OF UZAL H. MARTZ, JR., PRESTOENT AND PUB- 
LISHER, POTTSVILLE REPUBLICAN, ON BEHALF OF THE 
NEWSPAPER ASSOCIATION OF AMERICA 

Mr. Martz. Mr. Chairman and members of the subcommittee, 
my name is Uzal Martz. I am president and pubHsher of the Re- 
pubHcan in Pottsville, PA. I appreciate the opportunity to appear 
before you today to present the views of the Newspaper Association 
of America, NAA, on S. 1086. I am secretary and a member of the 
NAA board of governors. 

NAA represents approximately 1,250 newspapers in the United 
States and Canada. The majority are daily newspapers that ac- 
count for more than 80 percent of the daily circulation in the Unit- 
ed States. 

In the interest of time I would just like to summarize my written 
statement by starting out first and foremost to commend the chair- 
man and Senator Danforth on the clear focus in S. 1086 on preserv- 
ing and promoting the diversity and competition that has devel- 
oped in the information services marketplace, and in the means of 
delivering these services. 

Both of these are essential if the United States is to continue to 
lead the world into the Information Age, and consistent with this 
goal NAA has reviewed S. 1086 and finds much in the bill to com- 
mend. 

There are three major points that I would like to make which are 
elaborated on in my statement. First and foremost, American news- 
papers have a special stake in the development of a vibrant tele- 
communications infrastructure as envisioned in this bill. For 300 
years a free press has been central to the political, economic, and 
social life of this country. Telecommunications technology from 
computers to satellites have enabled newspapers to gather and dis- 
seminate news more effectively, with greater responsiveness to our 
readers, and will help ensure that this tradition will continue into 
the next century. 

For more than two decades, newspapers have been very active 
participants in the development of electronic information services. 
Today hundreds of newspapers, from large and small dailies, met- 
ropolitan areas, small communities provide a growing menu of 
services. And we have listed in this directory all of the services 
that are presently being provided by U.S. newspapers. 

More than 500 newspapers offer more than one information serv- 
ice on stock quotes, time, temperature, weather, news, homework 
hot lines, electronic classifieds, and minimovie reviews; 400 news- 



103 

papers offer 900 information based services; and 140 provide full, 
on-line access to full-text data bases of their newspapers. 

My own newspaper in Pottsville, PA, which has a circulation of 
30,000 offers our community 295 different information categories in 
our audiotext system. This service is advertiser supported, and free 
to the caller. 

There are 24,000 other entities who provide information services 
today in one form or another on everything imaginable, which 
makes the United State today a world leader in the information 
services marketplace with more than half of the information data 
bases available, and provides a positive international trade bal- 
ance. 

The second point I would like to make is that NAA strongly sup- 

f)orts S. 1086's commitment to fostering competition in the local 
oop. A competitive local exchange marketplace is the best safe- 
guard against anticompetitive abuses by local telephone companies. 
The ability of both information providers and information seekers 
to choose from alternate transmission facilities will enable both to 
enjoy the fruits of competition of many suppliers competing on 
price and quality. 

There is no doubt that the RBOC's continue to exercise monopoly 
control over the local telephone facilities that competing electronic 
publishers must use to reach their customers. Absent an entry test, 
which is based upon evidence of competition, strong safeguards are 
essential to ensure that safe transition that we have been hearing 
about today from the monopoly telecommunications facilities to 
truly competitive ones. 

The third point is that NAA is pleased that S. 1086 includes a 
strong starting point in this transition from where we are today in 
the provision of electronic publishing services by the RBOC's, in re- 
quiring separate subsidiaries, mandating arm's-length dealings be- 
tween the RBOC's and their subsidiaries, requiring cost allocation 
and other provisions. 

We believe that these safeguards should be strengthened. And I 
dare say your bill, S. 2112, is a legend in its own time and set 
standards that we feel should be considered for incorporation into 
S. 1086. 

As you may know, representatives of NAA and the RBOC's have 
been meeting for several months now in an effort to reach agree- 
ment on a package of safeguards to help prevent competitive 
abuses by the RBOC's when they enter information services. These 
talks are ongoing and have not produced a result yet, so I cannot 
comment on the substance of the talks. Nevertheless, I am hopeful 
that at some point they will make a positive contribution to your 
efforts to protect consumers and enhance competition in the infor- 
mation services market. 

Mr. Chairman, everv newspaper large and small, and we fully 
support the concerns that the National Newspaper Association has 
just voiced, recognizes and appreciates your untiring efforts on be- 
half of free competition and information services. We look forward 
to working with members of the committee and the staff in helping 
to ensure that this exciting time of diversity of information and 
new infrastructures comes to fruition. 

Thank you. 



104 

[The prepared statement of Mr. Martz follows:] 

Prepared Statement of Uzal H. Martz, Jr. 

Mr. Chairman and members of the subcommittee, my name is Uzal Martz, and 
I am President and PubUsher of the Republican in PottsviUe, Pennsylvania. I appre- 
ciate the opportunity to appear before you today to present the views of the News- 
paper Association of America ("NAA") on S. 1086, the Telecommunications Infra- 
structure Act of 1993. I am Secretary and a member of the NAA Board of Gov- 
ernors. 

The Newspaper Association of America represents approximately 1,250 news- 
papers in the U.S. and Canada. The majority are daily newspapers that account for 
more than 80 percent of the daily circulation in the U.S. 

America's newspapers have a special stake in the development of a N'ibrant tele- 
communications infrastructure. For three hundred years, a free press has been 
central to the political, economic, and social life of this country. That tradition must, 
and will, continue into the next century. Telecommunications technology from com- 
puters to satellites has enabled the newspaper industr>' to gather anddisseminate 
news more efficiently and with a greater responsiveness to our readers. 

The rise of electronic information services also provides us with a wide range of 
new business opportunities. For more than two decades, we have been a^ive partici- 
pants in the development of these services. Today, hundreds of newspapers, from 
large metropolitan dailies to those serving small communities, provide a growing 
menu of information services. For example, more than 500 newspapers nob offer at 
least one voice information service, providing information ranging from stock quotes 
and weather reports to homework hotlines and brief recordings by musicians per- 
forming in local concerts. Many newspapers offer electronic classified ads, mini- 
movie reviews, and a variety of other services. At least 400 newspapers are offering 
900-number information services. More than 140 newspapers provide on-line access 
to full-text databases of their newspapers. 

Our newspaper in Pottsville, for example, which has a circulation of 30,000, offers 
our community 295 different information categories in our audiotext service. The 
service is advertiser-supported and fi?ee to the caller. 

In addition to newspapers, no less than 24,000 other entities provide information 
services today. These services offer everything from complex legal hbraries to re- 
ports on local surfing conditions, and are run by cable companies, broadcasters, 
database services, and start-up entrepreneurs. The information services industry in 
the U.S. has flourished, making us a worid leader in the information services mar- 
ketplace. This industry produces more than half of all databases available world- 
wide and enjoys a positive international trade balance. 

K the U.S. is to continue to lead the world into the "information age," we must 
preserve and promote the diversity and competition that has developea in the infor- 
mation services marketplace and in the means available for delivering those serv- 
ices. Consistent with this goal, NAA has reviewed S. 1086 and finds much in the 
bill to commend. 

First, NAA is pleased that the bill includes safeguards to govern the provision of 
information services by the Regional Bell Operating Companies ("RBOCs"). Unfet- 
tered participation by the RBOCs in electronic publishing, which has been author- 
ized by recent court decisions repealing the MFJ's information services restriction 
and by recent FCC decisions, will harm competition, information diversity, and con- 
sumers. 

There is no doubt that the RBOCs continue to exercise monopoly control over the 
local telephone facilities that competing electronic publishers must use to reach 
their customers. The RBOCs' control over the sole means of distribution for competi- 
tors gives them the ability and the incentive to undermine competition in the infor- 
mation services marketplace, if they choose to do so. They could favor their own 
services by denying or impeding access to the network by others, or they could use 
revenues from telephone rate payers to subsidize their entry into information serv- 
ices. 

Because the RBOCs retain monopoly control over essential local telephone lines 
and the ability and incentive to abuse this power, legislation imposing tou^ and 
effective safeguards on RBOC particijMition in electronic publishing is urgently need- 
ed to preserve diversity and promote competition in the information services mar- 
ketplace. S. 1086 provides a strong starting point by permitting the RBOCs to pro- 
vide information services only throu^ separate subsidiaries; mandating arm's- 
length dealings between the RBOC and its subsidiaiy; requiring the establishment 
of a cost allocation system to prevent cross-subsidization; and imposing certain other 



105 

regulatory safeguards. NAA believes that these safeguards should be strengthened, 
and we look forward to working with the Subcommittee to improve them. 

As you may know, representatives of the NAA and the RBOCs have been meeting 
for several months now in an effect to reach agreement on a package of safeguards 
to help prevent anticompetitive abuses by the RBOCs when tney enter information 
services. These talks are ongoing and have not produced a result as yet, so I cannot 
comment on the substance of the talks. Nevertheless, I am hopeful that at some 
point they will make a positive contribution to your efforts to protect consumers and 
enhance competition in the information services maricetplace. 

Finally, let me make it clear that NAA supports fuUy the efforts of NNA and com- 
munity newspapers to achieve the goals they nave described today. 

In addition to supporting the biU s inclusion of safeguards, NAA also strongly sup- 
ports S. 1086's commitment to fostering competition in the local loop. In msmy ways, 
a competitive local exchange marketplace is the best safeguard against anticompeti- 
tive abuses by local telephone companies. Best of all, with the ability to choose from 
alternate local transmission facilities, electronic publishers will be able to enjoy the 
fruits of competition — that is, many suppliers competing on price and quality. 

As you know, Mr. Chairman, we have long supported policies to encourage local 
loop competition. S. 2112, the bill you introduced in the last Congress and which 
we strongly endorsed, recognized the critical nexus between growth of local competi- 
tion and information diversity. An infrastructure comprising a "network of net- 
works," rather than one that relies on a single provider or a particular technology, 
will encourage innovation and offers the best opportunity for thousands of large and 
small businesses to provide the widest possible range of electronic information serv- 
ices. We are encouraged by the growing evidence in the marketplace that such an 
infrastructure is not only desirable, but technically and economically feasible. We 
welcome these developments. 

We must caution, however, that the potential for local competition is not the same 
thing as competition itself. The removal of legal and regulatory barriers will open 
the way for the development of competition, and we are hopeful that competition 
will develop swiftly. As this Subcommittee well knows, however, predictions of the 
rapid growth of competition in any ^ven sector of the telecommunications industry 
often prove optimistic. UntU there is effective competition in the local exchange — 
and the bottleneck controlled by the RBOCs is broken — the need for meaningfiil, ef- 
fective safeguards remains. 

Mr. Chairman, every newspaper, large and small, recognizes and appreciates your 
untiring efforts on behalf of fair competition in iiiformation services. We look for- 
ward to working with you and your staff in this exciting time to fashion a 
teleconunications infrastructure policy that ensures a future oi information diversity 
and competitive choices for the .American public. 

Thank you. 

Senator Inouye. Thank you very much, Mr. Martz. Mr. Smith. 

STATEMENT OF JAMES M. SMITH, PRESmENT, COMPTEL 

Mr. Smith. Thank you, Senator Inouye. I have a prepared state- 
ment for the record and I would be happy to answer questions on 
it, and in fact I would ask leave to supplement that statement be- 
fore the hearing record closes, but allow me to settle for four or five 
key points. 

My name is James M. Smith. I am president of CompTel, the 
Competitive Telecommunications Association. We are the national 
industry association for over 120 small- and medium-sized long dis- 
tance carriers and their suppliers, and I am happy to have the op- 
portunity today to testify on behalf of the Nation's long distance in- 
dustry. Mr. Cullen devoted most of his statement to long distance 
entry, and I will do the same. 

Point 1 is that S. 1086 is close to being an excellent bill, indeed, 
a visionary bill, because it will do several important things. It 
would help induce meaningful local competition where today there 
is none. 

This is a chart generated by AT&T which shows that 99.86 per- 
cent of its 1992 local access pa3mients went to the monopoly local 



106 

exchange carriers. That leaves fourteen one-hundredths of 1 per- 
cent of its access payments to all competitive access providers com- 
bined. 

Competition in the local loop would bring greater local infrastruc- 
ture development, which has not happened yel to the extent that 
it should in the local exchange as it has happened in the long dis- 
tance industry under the spur of competition. 

Since the year after divestiture, 1985, AT&T, MCI, Sprint, the 
NTN Consortium of CompTel companies and many others have laid 
over 2.4 million miles of fiber in this Nation. 

Mr. Cullen says that the local exchange carriers have built more 
fiber. Of course that is correct because of the intensity of the local 
networks, as opposed to the long distance networks, and because 
there is a difference between a fiber that is operational and a fiber 
that is not, or is unlit. 

There is no greater spur to modernizing a network than to risk 
that a competitor will beat you to it. That happened — exactly that 
happened in the long distance industry in the late 1980's. It should 
be required to happen in the local loop as well. Local competition 
and local infrastructure development go hand-in-hand. 

Point 2 — ^but the bill gets badly mixed up and in fact I think cor- 
rupted by including MFJ long distance restriction relief for RBOC's 
in several sections of the bill. That would be extremely counter- 
productive to the purposes of the bill and harmful to the competi- 
tive long distance industry for two reasons. 

One is that it would incent and encourage the local exchange car- 
riers, and particularly the RBOC's, to concentrate their investment 
not on local infrastructure development but on the development of 
RBOC long distance networks, which would be, as I have said, ba- 
sically useless since the long distance infrastructure, the long dis- 
tance digital information superhighway, is already in place. What 
is needed is the on-and-off ramps, the local first mile and last mile, 
to complement that long distance infrastructure. 

Second, long distance entry that is contemplated in the bill 
seems to be rather narrow. But Mr. Cullen obviously is espousing 
a complete long distance entry, and the Bell companies are espous- 
ing that in their lobbying efforts as well. That would cause grievous 
harm in an industry that has been the paragon of competition in 
the last 10 years. 

It is not true that long distance rates on the whole have gone up 
in the last couple of years. They have continued to go down, and 
studies by USA Today and TRAC have testified to that. Since di- 
vestiture long distance prices have gone down over 40 percent in 
absolute terms, and in CPI terms effectively 53 percent over the 
last 10 years. 

There are now 400 long distance carriers in the Nation. And, as 
I said, there are 2.4 million fiber miles in the long distance net- 
works, all the result of competition and because of the successful 
public policy that this Congress and the courts exercised in early 
and mid 1980's. 

The Bell System was broken up because of discrimination and 
cross-subsidization concerns. It was proven that the Bell compa- 
nies, when they were the unified Bell System of long distance and 
local exchange, discriminated against would-be long distance com- 



107 

petitors and did not allow competition to take root in that market. 
It would happen again. A GAO report released just early this year 
concluded that the FCC's efforts to control cross-subsidization have 
not succeeded and cannot succeed. 

Point 3: Do the Bells need interexchange entry? I think the an- 
swer is absolutely not. As I have shown, they control 99.9 percent 
of access dollars, 99.75 percent of total local exchange revenues. 
They have record revenues and profits. Indeed, Bell Atlantic re- 
cently reported record first quarter revenues of $4.6 billion and 
record profit of $414 million. That is in the first quarter of 1993, 
3 months in a sluggish economy. 

Next, they are already in the long distance business to an aston- 
ishing but really unappreciated extent — 45 cents of every long dis- 
tance dollar goes to local exchange carriers in the form of access 
pavments. Wnen you include short-haul long distance, which the 
Bells provide — intra-LATA toll — the percentage of long distance 
dollars that are enjoved by the local exchange carriers is 54 percent 
of all long distance dollars. 

Their record on iobs has been dismal. Tens of thousands of jobs 
have been lost in the United States at the hands of the RBOC's at 
the same time that they have spent $11.3 billion overseas for over- 
seas investments in 1990 through 1992 alone. Meanwhile, local 
rates have gone up as long distance rates have gone down. 

Point 4: So, what you have here, Mr. Chairman, is the Bell com- 
panies' failure to modernize their local infrastructure adequately, 
and asking for new benefits in return for doing it now, and those 
new benefits would divert their investment and their resources 
from the job of developing local infrastructure. It is not only like 
the proverbial child who kills his parents and then begs for the 
mercy of the court as an orphan, it goes fiirther and applies to the 
court for orphan's benefits. 

This may sound harsh, but let me be clear, the Bell companies 
provide good local telephone service, but they have a duty and a 
responsibility while they are still monopolies, and while they do 
enjoy 99 percent, 99.9 percent of the marketplace, to modernize 
their networks. They have not sufficiently, so clearly you need local 
competition to spur them to do it. 

The Bells should come back when they have done their duty to 
modernize their infi-astructure and there is true local competition 
in the local loop, and then should apply for abolition of the 
interexchange restriction. 

Until then, to paraphrase Admiral Stockdale during the Vice 
Presidential debate, why are we here? The long distance restriction 
really should not be on this table. The USTA representative a few 
minutes ago declined your invitation to even speak to that restric- 
tion, and I do not think it should be on the table just in a back- 
door way. MFJ relief has no place in a network infi:-astructure, local 
infi"astructure and local competition bill. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Smith follows:] 

Prepared Statement of James M. Smith 

Thank you, Mr. Chairman. My name is James M. Smith. I am President of the 
Competitive Telecommunications Association. CompTel is the national industry as- 
sociation of over 120 small and medium-sized long-distance telecommunications 



108 

companies and their suppliers. I appreciate the opportunity to testify before the 
Subcommittee on behalf of the nation s long-distance industry. 

We believe that, with needed changes, S. 1086 can represent a visionary effort to 
introduce genuine competition and private investment into local telecommunications 
maritets, where little or no competition presently exists. In particular, the introduc- 
tion of real competition in the local loop should result in lower local telephone rates 
and lower long-distance rates, for at last there would be price competition for the 
local access charges that comprise 40-50 percent of a long-distance company's costs. 
The long-distance industry — which has become the paragon of such competition as 
a result of immensely successful pro-competitive public policy by Congress, the Judi- 
ciary and six Presidential administrations — strongly supports affirmative legislative 
action to foster competition in present monopoly telecommunications markets, with- 
out causing harm to the beneficial and still-developing competition that has charac- 
terized the interexchange marketplace in the past decade. But there is the rub, be- 
cause as now drafted S. 1086 would significantly harm competition in long-distance 
even as it seeks to create competition in the local exchange. 

For its part, the competitive long-distance telephone industry has already contrib- 
uted enormously to the modernization of the nation's telecommunications infrastruc- 
ture since the Bell System breakup just nine years ago. The spur of this competition 
has resulted in the expenditure of $8-9 billion since the mid-1980s by consortia of 
CompTel member companies as well as AT&T, MCI, Sprint, and many others, to 
lay over 2.4 milHon miles of fiber transmission capacity throughout the nation. As 
Vice FVesident Grore and many others have recognized, the digital information su- 
perhighway already is in place with vast capacity in the long-distance portion of the 
system. And it has been financed entirely by the long-distance companies them- 
selves, without any assistance, give-backs or promises by the government. Nor has 
it been borne on the backs of captive local ratepayers. 

The problem is that this great long-distance superhadiway can't be utilized to the 
full advantage of the nation unless and until the on-and-ofT ramps — that is, the local 
telephone networks now dominated by Bell Company monopolies — are modernized. 
Local "digital driveways" are the final critical links to finish the superhi^wav. 

That's why local competition legislation like S. 1086 is so important— so tnat the 
heat of competition will compel the Bell monopolies to dramatically improve their 
local telecommunications infrastructures, as it has so successfully in the long-dis- 
tance marketplace. There is no greater spur to modernizing one's network than to 
risk that a competitor may beat you to it. The question of tremendous importance 
to the lone distance industry, then, is: What does allowing the monopoly Bell compa- 
nies into tne competitive long-distance industry have to do with local infrastructure 
development? 

In our view, these provisions of S. 1086 reward the BOC monopolies for their fail- 
ure to modernize their infrastructure by starting down the path toward lifting the 
core prohibition on Bell company provision of long-distance services that enabled the 
successful development of long-distance competition in the first place. More to the 
point, why give the Bell companies this huge plum while they are still monopolies, 
enjoying a virtual stranglehold over the local exchange bottleneck through which all 
telephone calls must pass? In other words, lifting the restriction in any fashion re- 
wards an entrenched monopoly for its record profits, record layoffs, record invest- 
ment in foreign countries, and failure to build local facilities to complement the long 
distance infrastructure that we have built four times over. 

The 1984 divestiture of the Bell System and the consequent opening of long-dis- 
tance to competition has been tremendously successful and beneficial to the Amer- 
ican people. Long-distance providers will tell you that competition is imperfect and 
still aeveloping, but make no mistake that there is real competition in tne long-dis- 
tance marketplace. One need only look at the number of long-distance providers — 
over 400 by most counts — or at their prices, which have plummeted by more than 
50 percent in real terms over the past nine years, or to the laying of those 2.4 mil- 
lion miles of fiber caused solely by competition. S. 1086 seeks to introduce that kind 
of competition into the local telephone marketplace, and that's good. But it makes 
absolutely no sense to strengthen the hand of the monopolist with one hand — and, 
critically, to divert its attention from the task at hand, namely local infrastructure 
development — even as you subject it to competition with the other. Passage of this 
bill as currently drafted will result in a huge diversion of Bell Company funds to 
loM-distance development, to the detriment of infrastructure development. 

So then: Why implicate the MFJ interexchange prohibition in tms bill? The Bell 
companies will variously tell you that their bottleneck has been shattered, that local 
competition is here today, that they cannot survive unless they are allowed to pro- 
vide interexchange services, that American jobs are at stake. But let's look at some 
facts, which the Bell companies may dodge but cannot deny: 



109 

Fact 1: By any estimate the Bells control over 99 percent of the local exchange 
maricetplace. In terms of revenues, in 1992 the Bells had 400 times the revenues 
of all loceil access competitors combined. Bell Atlantic recently reported record 1st 
quarter revenues of $4.16 billion and record income of $414 million. That's in 3 
months in a sluggish economy. 

Fact 2: In the most bottom-line sense — money — the Bells are already in the long- 
distance business to a massive degree, because between 40-50 cents of every long- 
distance dollar goes to local exchange companies in the form of access payments. 
Local access is the largest operating expense of every long-distance company and 
one of the largest sources of Bell Company revenues. 

Fact 3: The BOCs' record for creating jobs for U.S. workers in recent years has 
been dismal — in fact, they have decreased their U.S. payrolls by hundreds of thou- 
sands of workers in the past 8 years even as they invested $11.3 billion overseas 
in the past three years alone. A recent study by New Networks Institute concluded 
that the Bells now serve their investors first and their ratepayers second. 

Fact 4: Local rates have gone way up even as long-distance rates have been cut 
in half. The same study found that average toll charges across the U.S. cost consum- 
ers and businesses $4.9 billion dollars more than if long-distance companies offered 
the service. It costs 90 percent more to make a one-minute call from Manhattan to 
Montauk, Long Island 75 miles away than to call 2,900 miles to California. Compare 
the long-distance experience: in 1984 AT&T charged $2.70 for a 5-minute daytime 
call from Washington to LA. Now the charge is $1.25 — and the smaller carriers 
generally charge even less. 

So when the Bells tell you that there is no bottleneck, or they can provide lower 
long-distance rates in any form, please look at history and demand that they show 
you how based on their historical experience. Stripped down, the Bell companies' ar- 
gument for MFJ relief is: If you're going to take away our monopolies you have to 
first free us to provide interexchange services. Or: give us MFJ relief now and then 
well show you local competition. But they have it backwards. Make them show you 
that there is real, measurable, broad-based competition, not that there might be 
someday. Then — and only then — should the BeUs be allowed to provide 
interexchange services. 

BeU entry into the interexchange arena could only harm long-distance competi- 
tion. The core reason for the government's breakup of the Bell System was that the 
integration of monopoly local exchange telephone service with long-distance service 
bred cross-subsidization and discrimination that was making it impossible for fledg- 
ling competition to take root in the long-distance market. Well, this February a 
GAO Report (OAO/RCED-93-34) found that FCC regulation cannot prevent RBOC 
cross-subsidization. And as for discrimination, consider that every long-distance car- 
rier must depend on the monopoly local carrier for its access to customers. In order 
to get that access, it must give the BeU company its most proprietary customer lists 
and information. Now imagine if the RBOC that utterly controls that access and 
that customer information is directly competing with the long-distance carrier. That 
is the very antithesis of a level playing field. 

Some may say that S. 1086 aoesn't let the Bells too far into long-distance, rather 
that it opens the door only a little, in the areas of cable and cellular. The answer 
is simple: you yourselves have heard from the Bells that thev want much, much 
more, if not this year then next. MFJ waivers have routinely oeen granted for cel- 
lular and the Uke. They don't need legislation for that. Their explicit agenda is sig- 
nificant long-distance entry. If the Senate wishes to carve out these two narrow ex- 
ceptions, it should codify the rest of the MFJ long-distance restriction until there 
is real, substantial local competition. 

Fd also like to address one other important provision of S. 1086: in the wake of 
a federal court decision just last week, the FCC may now have no fleribility to re- 
lieve non-dominant long-distance carriers of the burden of filing tariffs to cover 
every single rate they charge. CompTel strongly supports a strengthened Section 
5(h)(1) of the bill to preserve the Commission's ability to maintain flexibility in its 
tariff regulation of smaller, non-dominant carriers. 

In summary, critically needed local infrastructure development wUl come with 
local exchange competition, just as it did with long-distance competition. That's why 
S. 1086 has great merit as a local competition bill. But there is no earthly reason 
why long-distance should be implicated in this bill. In fact, it would only give the 
Bells a perverse incentive to turn their investment to businesses other than a state- 
of-the art local network. If the Bells can't show you that even 1 percent, much less 
10 or 20 percent of their traffic or revenue has gone to the competitors; if they can't 
show you that their monopoly revenues and profits have even suffered a dent; if 
they can't show you that they have created even one net U.S. job in the past 5 



110 

years— because they certainly have created thousands overseas; then I ask you why 
they should be rewarded now with even limited long-distance entry .^ 

Make them show you something more than illusion. If they don't, then the MFJ 
provisions of S. 1086 are just a giveaway that will make S&L deregulation pale by 
comparison. No lawmaker wants to harm irreparably a market that has become a 
model of competition thanks to wise public policy— namely, the U.S. long-distance 
market. With regard to long-distance, our plea is: if it ain't broke, don't break it. 

[Appendices may be found in the committee files.] 

Senator Inouye. Thank you very much, Mr. Smith. Mr. Metahtz. 

STATEMENT OF STEVEN J. METALFTZ, VICE PRESmENT AND 
GENERAL COUNSEL, INFORMATION INDUSTRY ASSOCIATION 

Mr. Metalitz. Thank you, Mr. Chairman, for this opportunity to 
present the perspectives of the Information Industry Association on 
S. 1086. 

IIA represents some 500 companies that are involved in the cre- 
ation, distribution, and use of information products, services, and 
technologies. Our member companies are dedicated to meeting the 
information needs of American business, professional and consumer 
markets. 

Our association is also uniquely positioned, I think, among all 
those you have heard from today, to offer a balanced and com- 
prehensive perspective on this legislation, since our members in- 
clude not only many of the leading information providers and elec- 
tronic publishers but also some of the leading telephone companies, 
both local and long distance. 

Mr. Chairman, when you and Senator Danforth introduced this 
legislation last month, you called it "a landmark day in the history 
of the Senate's consideration of telecommunications infrastructure 
policy." We think that is an accurate assessment. This legislation 
does break new ground. It anticipates the new realities of a mar- 
ketplace that is changing quite dramatically. It helps to shift the 
terms of debate to a more constructive plane. 

We have heard a lot of discussion of frustration in this room this 
morning, but I think there are also some broad areas of agreement 
and some grounds for hope that diverse interests can work together 
to achieve greater benefits for the American public. 

Mr. Chairman, this legislation achieves this breakthrough be- 
cause it reflects three fundamental realities about the way ahead 
in the telecommunications marketplace. First, it recognizes that 
more competition is the key that will unlock the potential for devel- 
oping and deploying advanced infrastructure. In particular, bring- 
ing competition to the local telephone loop is an essential pre- 
condition for the American people to enjoy the full benefits of the 
Information Age. 

Second, the bill calls for a strong Federal leadership role in open- 
ing up competition throughout the network. That leadership role 
includes preemption of State rules and regulations that stand as 
obstacles to local competition. 

Finally, the bill recognizes that strong safeguards are needed to 
ensure a level playing field. 

I would agree with Mr. Martz that competition is the best safe- 
guard, but it is not the only safeguard that is needed in this situa- 
tion. Monopoly advantages do not disappear overnight simply be- 
cause an administrative agency says they are gone. Structural sep- 



Ill 

aration and interconnections guarantees, as you provide in the bill, 
are among the safeguards that are needed. 

IIA strongly supports all three of these elements of the frame- 
work of S. 1086. They are fully consistent with the positions that 
we have taken in our paper on telecommunications infrastructure 
objectives which we have attached to our testimony. That paper re- 
flects a consensus viewpoint among our diverse membership, and 
we hope it is useful in a very practical way to you and your staff 
as you work on refining this bill. 

The bill does contain the broad outlines of a constructive legisla- 
tive solution, and we commend you and Senator Danforth for your 
leadership in this regard. We do have some comments and sugges- 
tions about some important aspects of this legislation. We also 
agree with some of the statements that have come before us this 
morning. Let me just summarize a few of our concerns. 

First, this is sweeping legislation. It is intended to be so, and in 
that situation there needs to be some close attention to the defini- 
tions that this bill writes into the Communications Act for the first 
time. In particular, the bill provides a rather complex definition in- 
volving telecommunications carriers, information service providers, 
and enhanced service providers. 

The FCC has made a longstanding distinction between basic and 
enhanced services. It is a binary distinction. It is easy to under- 
stand, it is relatively easy to apply, and it has been very valuable 
in demarcating the limits of regulation in this area. 

We would urge the subcommittee to reexamine whether that sim- 
ple definition might be more effective than the more complex defi- 
nition in the bill. We do have some concerns that without some 
change in that regard, there is a risk that some companies other 
than true telecommunications carriers will be classified as carriers 
under this bill. That is not what we think the bill intends to 
achieve. 

Second, we would suggest that the legislation should reaffirm the 
viability of antitrust law in this area. Strong antitrust protections 
remain essential for deterring and punishing anticompetitive be- 
havior by any party in the telecommunications marketplace. 

Third, we think Congress should legislate more specifically with 
regard to interconnection and access requirements, including a re- 
quirement for complete unbundling of services and for cost-based 
pricing. Putting some more detail in this legislation will help en- 
sure that the network does become truly available, truly open to all 
competitors on equal terms and conditions. 

Finally, we would suggest in some areas a clearer statement of 
Federal preemption. We think this legislation does send a very 
strong and constructive signal to the States, but that that could be 
spelled out more clearly. 

In conclusion, Mr. Chairman, we applaud the steps that you and 
Senator Danforth have taken in introducing this legislation. We 
know that considerable work remains in filling in the broad out- 
lines that it sets forth, and we are ready and willing and eager to 
assist you and the subcommittee members in that task. 

Thank you very much for your invitation to testify. 

[The prepared statement of Mr. Metalitz follows:] 



112 

Prepared Statement of Steven J. Metalitz 

My name is Steven J. Metalitz and I am Vice President and General Counsel of 
the Information Industry Association. IIA welcomes the opportunity to provide its 
perspective on S. 1086, the Telecommunications Infrastructure Act of 1993. HA is 
a trade association of more than 500 companies, which celebrates its 25th anniver- 
sary this year. Our member companies are involved in the creation, distribution and 
use of information. ILA's membership includes entities of all sizes providing en- 
hanced services, telecommunications and associated equipment, print media and 
electronic publishing services, as well as some of the largest providers of common 
carrier services. Has members are in the forefront of the development and imple- 
mentation of new information products and technologies. 

HA supports S. 1086 for its vision of an advanced, affordable, ubiquitous tele- 
communications infrastructure driven by market forces and competition. Such an in- 
frastructure will speed the benefits of the Information Age to Americans. IIA has 
endorsed this vision in its Telecommunications infrastructure Objectives and Imple- 
mentation Principles.! Now, whether through increased local competition while pre- 
serving universal service, improvement of services in rural areas or removing the 
regulatory uncertainty between local and federal authorities, the Telecommuni- 
cations Infrastructure Act of 1993 can go a long way in bringing the best of the In- 
formation Age to the doorstep of America. 

HA has always been a supporter of a regulatory and marketplace environment 
that will ensure the maximum opportunities for the development and enhancement 
of information-related services. We believe that the avaUabiiity of efficient, economi- 
cal and ubiquitous telecommunications services is critical to the free flow of informa- 
tion throughout our society. We commend the Subcommittee for holding this hearing 
to examine such important issues. 

It is important to note that ELA's members include not only independent enhanced 
service providers, but also regional Bell Operating Companies (RBOCs), 
interexchange carriers (DCCs), independent telephone companies (iTCs) and local ex- 
change carriers (LECs). This unique membership mix gives HA a balanced perspec- 
tive on the important issues addressed by S. 1086. HA consistently has urged the 
establishment of fair ground rules for the participation and protection of all users, 
competitors and carriers aUke in the telecommunications marketplace. 

HA appreciates the complexity of the issues contained in S. 1086. Within our own 
organization, we also have had to grapple with a fundamental principle of fairness 
in a marketplace of diverse technological capabilities and rapid business and techno- 
logical growth. It has not been an easy task and as stated m our letter to the prin- 
cipal sponsors of S. 1086 on June 22, 1993, we applaud the effort this bill represents 
"in tackling such difficult issues as telecommunications infrastructure, privacy, and 
network development." This is a bill that offers many positive solutions to current 
issues facing telecommunications providers, enhanced service companies and users 
while leaving open the opportunity for growth and advancement in the future. 

Despite our broad interest in S. 1086, we will limit our comments to a few critical 
areas of greatest importance to our members. First, we note that the testimony you 
hear today shares a number of our concerns with regard to the creation, mainte- 
nance and monitoring of appropriate safeguards to assure market fairness and pre- 
vent discrimination, cross-subsidization or other anticompetitive behavior by local 
exchange carriers. 

In addition, we agree with others about the Importance of customer proprietary 
network information (CPNI). Not only from the perspective of necessary privacy pro- 
tections, IIA believes that opportunities for the use of and access to CPtTI urJbrtu- 
nately have been skewed to the advantage of the basic telephone service providers 
who both create much of this information and hold the keys to its first and easiest 
use. 

Further, as this bill sets the stage for improved and widespread availability of 
digital transmission facilities for all American users, we applaud what S. 1086 can 
do to make more and valuable services accessible. For example, open and voluntary 
standards should be encouraged to benefit all parties, particularly end users. In 
many respects, S. 1086 can encourage the use of voluntary standards as providers, 
users and regulators embark upon improvements in information highways with high 
service quality and network reliability — features so essential to the competitive suc- 
cess of our country's information services. 

With this background, we are pleased to offer comments on four issues that 
should be resolved if this legislation is to achieve its objectives: 

• The scope and implication of the definitions contained in S. 1086; 



lA copy of these principles and objectives may be found in the committee's files. 



113 

• The appropriateness of strong antitrust protections; 

• The need Tor strong direction to ensure cost-based pricing of basic services of- 
fered by local exchange carriers and avoidance of enhanced service provider access 
charges; and 

• The importance of a clear and unequivocal statement on federal preemption of 
any state puoUc utility and entry/exit regulation of enhanced services. 

S. 1086 BECOMES A MORE POWERFUL INSTRUMENT FOR CHANGE BY ADOPTING WIDELY- 
ACCEPTED SERVICE DEFINITIONS 

In its Computer 11 decision, the Federal Communications Commission l(FCC) de- 
cided that "the provision of enhanced services * * * is not subject to Title II regula- 
tion, nor is a regulatory scheme for enhanced services * * * required to protect or 
promote the overall objective of the Communications Act." HA members, and indeed 
carriers and ESPs worldwide have relied on this regulatory framework in the devel- 
opment and offering of their services. This definition clearly separates basic trans- 
mission from any enhancements which may be added to the transmission that make 
it a new, different, and generally improved product. 

The FCC decision was based on the following definitions: 

* * * [B]asic service is hmited to the common carrier ofTering or transmission 
capacity for the movement of Information, whereas, enhanced service combines 
basic services with computer processing applications that act on the format, con- 
tent, code, protocol or similar aspects of the subscribers' transmitted 
infomatlon, or provide the subscriber with additional, different or restructured 
information, or involve subscriber interaction with stored Information. 

Although DA has not always agreed with FCC decisions, in this instance the 
Commission crafted a definition that works. The Commission language draws a 
bright line separating two distinct services: getting from Point A to Point B using 
a telecommunications medium, as distinct from any number of enhancements that 
could be employed along the way. This is a definition that allows enhanced services 
to be offered by telephone companies, whether LECs, RBOCs, EKCs, or ITCs, and 
by non-telephone companies, including computer companies, database companies, or 
Information providers. It Is the addition of "computer processing" applications as de- 
scribed in Computer II, which changes basic services into enhanced services — many 
of which also are information services. 

Under the FCC's definition, information services are a subset of enhanced serv- 
ices. Companies which offer enhanced services may purchase basic transmission 
services from common carriers at published tariff rates set by federal and state reg- 
ulators. Enhanced service providers use the capabilities of the nation's telephone 
networks to offer data, information and information management services. Some of 
these companies provide teleconmiunications and enhanced services — most often in 
separate business units — under current distinctions between basic and enhanced 
services. Most importantly, however, the regulatory status of the service is deter- 
mined by the nature of the service, basic or enhanced, and not by the nature of the 
company or the other services it offers. The fact is that enhanced service providers 
are not regulated as telecommunications companies. 

Instead of the widely-accepted distinction between basic and enhanced services, 
S. 1086 provides specific definitions for telecommunications services 1 Information 
services and electronic publishing. Consequently, IIA members find themselves con- 
fused as to whether their enhanced or gateway offerings could be characterized as 
telecommunications services and thus raise their service requirements to those of 
common carriers. 

For example, in addition to applying to transmission, the "telecommunications" 
definition includes the passage "with or without benefit of any closed transmission 
medium, including all instrumentalities, facilities, apparatus, and services (includ- 
ing the collection, storage, forwarding, switching, and delivery of such information) 
essential to such transmission." This portion of the definition could apply to private 
line networks used by online enhanced service providers, value aaaea networks, 
electronic mail systems or other enhanced services. Some companies may have ex- 
cess private network capacity which occasionally they offer for sale on a non-public 
basis. Others may have private lines for intra-company purposes associated with en- 
hanced products they offer. Regardless, such uses do not always involve what is tra- 
ditionally characterized as "iniormation." For these companies, only by rising to the 
level of an "information service" would they be exempt from the requirements of 
telecommunications service providers under Sec. 4 of the bill. 

Further, as crafted in S. 1086, the definition of information services excludes 
many of the added value enhancements that have made ESPs successfiil. Under the 
bill, information service is defined as "[T]he offering of a capability for generating, 



114 

acquiring, storing, transforming, processing, retrieving, utilizing, or making avail- 
able information which may be conveyed via telecommunications, except that such 
service does not include any use of any such capability for the management, control, 
or operation of a teleconununications system or the management of a telecommuni- 
cations service." This list does not reflect the range of activities today's and tomor- 
row's businesses and consumers are involved in with enhanced service products. 

Simply put, S. 1086 should apply to basic transmission mechanisms irrespective 
of any particular content. A distinction between basic and enhanced services, as 
enunciated by the FCC, Is all that is needed to ensure afair and complete regu- 
latory framework. Other definitions unfairly corral competitive enhanced service 
providers within teleconomunications service definitions. 

STRONG ANTITRUST PROTECTIONS SHOULD REMAIN CORE PRINCIPLES OF S. 1086 

In discussions of telecommunications infrastructure development, the need for 
strong antitrust protections must not be overlooked. It may be appropriate for S. 
1086 to have an antitrust savings clause" preserving all federal ana state antitrust 
laws with regard to LEG activities. Such language would acknowledge the impor- 
tance of universal service and also would preclude unfair advantages in the local 
loop. By narrowly crafting exceptions appropriate in universal service or other FCC- 
mandated activities, users in any area of the country could be assured of the most 
competitive alternative. 

As noted above, HA released its Telecommunications Infrastructure Objectives 
and Implementation Principles earlier this year. In that document, IIA noted: 

Market forces are the preferred means of determining telecommunications ap- 
plications and services, and thus the development of telecommunications infra- 
structure. 

As telecommunications maricets continue to evolve from a regulated monopoly 
to a competitive regime, the role of governments should be to promote competi- 
tion while protecting the public interest where competitive market forces are 
not yet fully operative. 
S. 1086 recognizes correctly that competitive market forces should drive tele- 
communications infrastructure development. However, particularly in regard to 
most LEC offerings, a monopoly situation currently exists. As time progresses, com- 
petition at the local level — undoubtedly spurred by legislation like S. 1086 — will re- 
move most, if not all, of this bottleneck. Until that time, full antitrust protections 
and vigorous enforcement are essential to the provision of market services. 

Strong antitrust protections can ensure that local exchange carriers would not be 
not insulated from antitrust law and regulation by the provisions of the Commu- 
nications Act this legislation would affect. Ultimately, HA is concerned that competi- 
tion not be harmed: not now as we move from a monopoly regime to a competitive 
one; and not in the future when fuU competition exists. Whenever there is anti- 
competitive behavior in the form of conspiracy, collusion, price-fixing or other unfair 
market manipulation that rises to the level of an antitrust violation, full enforce- 
ment, penalties and consequences should follow. Strong antitrust protections in this 
bill will facilitate the creation of simple rules governing economic, technical and fi- 
nancial aspects of competitive behavior In a changing technological environment. 

S. 1086'S ENDORSEMENT OF FULLY UNBUNDLED SERVICE OFFERINGS CAN ENSURE COST- 
BASED PRICING AND MARKET FAIRNESS 

For many years, EIA has argued vigorously for cost-based pricing in basic tele- 
communications sendees, offered in their simplest, unbundled form. Hand-in-hand 
with this argument has been the opposition to the imposition of access charges ap- 
plied to ESPs on the basis of supposedly different network use by such providers. 
ESP access charges included in current network configurations frequently benefit 
carriers which own and design the network, and work to a disadvantage to many 
non-telephone company affiliated providers. Unfortunately, as currently adminis- 
tered, open network architecture (ONA) and the accompanying cost accounting rules 
do not constrain effectively the ability of carriers to discriminate against competing 
enhanced service providers. 

In defining the obligations of telecommunications carriers, S. 1086 approaches the 
issue squarely in calling for: 

(1) interconnection * * * (2) nondiscriminatory access to any of the carrier's 
telecommunications facilities; (3) non-discriminatory access, where technically 
feasible, to the poles, ducts, conduits and rights of way owned or controlled by 
the carrier; (4) non-discriminatory access to network ftinctions * * * (and) (5) 
telecommunications services and network functions without any restrictions on 
the resale or sharing of those services and functions. 



115 

However, HA maintains that these requirements will not be enough to ensure the 
full and complete access to basic network infrastructure that the authors of this 
measure intend. 

This legislation should require unbundling of network services and facilities to 
allow customers the option of obtaining basic functional elements. Such services 
could Include end-user access lines, switch-based features, inter-oflice transport, sig- 
naling functions, ordering, testing, maintenance and other support services, billing 
and collection services or gateway functions. Such elements should be provided on 
an actual or virtual collocation basis in a non-discriminatory manner to any pro- 
vider. 

The unbundling of network features and functions must be accompanied by pric- 
ing which bears a fixed, reasonable and consistent relationship to Its underlying 
cost. Such cost-based pricing will ensure that all underlying costs are consistently 
allocated by a verifiable and independently auditable methodology covering 
unbundled services. 

In sum, S. 1086 should direct the FCC to: 

• Require local exchange services be sufficiently unbundled to meet market de- 
mand; 

• Prohibit LEG configuration of ONA service offerings in ways which best meet 
the needs of their subsimaries while ignoring the needs of competitors; 

• Grant independent enhanced service providers opportunities to participate in 
the benefits of equal access for service ana Information of equal type and price to 
carriers; 

• Increase collocation opportunities, whether actual or virtual; 

• Require cost-based pricing for aU service offerings to independent providers; 
and 

• Mandate that transactions between the RBOCs and their affiliates be on an 
arms-length basis that parallels the treatment afforded independent enhanced serv- 
iceproviders. 

These are the steps to a level playing field that Congress should tell the FCC to 
tsike. Once the level plaving field exists, the Commission should have the flexibility 
to consider expansion of'^the opportunities for regulatory parity among all providers. 
IIA looks forward to the emergence of fijll and effective competition and the ability 
of aU providers to offer any service. 

S. 1086 CAN STRENGTHEN ITS IMPORTANT STAND ON PREEMPTION 

HA always has argued for uniform rules to promote the enhanced services indus- 
try, especially as the industry develops on a regional and national basis. Uniform 
national policies will bring stability and growth to the enhanced services industry. 
The potential of unilateral action by a single state to deny its citizens access to an 
important Information marketplace will only harm the public interest. This point 
is admirably recognized in S. 1086. 

The availability of a competitive enhanced services marketplace is repeatedly 
threatened both by state public utility regulation of enhanced service providers' 
intrastate offerings, and by state efforts to claim jurisdiction over interstate offer- 
ings. The result is an ever-encroaching national patchwork of regulations for the en- 
hanced services industry that reduces consumer access to enhanced services by 
making It difficult for providers to offer services reliably on a national basis. 

IIA was among 16 trade associations and companies that petitioned the FCC for 
a ruling preempting state entry/exit and tariff regulation of enhanced services. 
These petitioners are national providers of a wide range of enhanced services that 
would be impacted negatively by diverse and incongruent state regulation of their 
services. For example, a number of iurisdiction, including Florida, Georgia, Dela- 
ware and the District of Columbia, had proceedings over the last couple of years 
that proposed to treat ESPs as carriers subject to public utility regulation. As noted 
above, HA vehemently disagrees that ESPs are basic telecommunications providers. 

As these matters have evolved, we were heartened by the resolution adopted by 
the Federal/State Joint Board on Open Network Architecture that spoke against 
such regulation. However, we are aware that the Joint Board has no regulatory au- 
thority and cannot bind the states. In anticipation of continued state attempts to 
regulate ESPs, we believe S. 1086 sends a strong and constructive signal about the 
distinction between national and local enhanced services; and the supremacy of fed- 
eral authority over interstate services. 

We are concerned, however, that the information services definition contained in 
Sec. 4 of S. 1086 and referenced in Sec. 13 may limit federal regulatory authority 
affecting other enhanced services. As discussed above, IIA supports the existing dis- 
tinction between basic and enhanced service providers. 



116 

HA has consistently advocated that there is no vaUd jxjlicy basis upon which a 
state regulatory body can or should seek to apply public utility regulation to the pro- 
vision of enhanced services. To the extent that states literally apply the guidelines 
of this legislation, additional confusion may result from the lack of a clear defini- 
tional standard. 

For example, Sec. 229 meets IIA's broad policy goals concerning preemption of 
state public utility regulation of enhanced services by forbidding any State or local 
statute or regulation, or other State or local legal requirement, (to) prohibit or limit 
in a manner inconsistent with Federal regulations or with this Act, the ability of 
any entity to provide interstate or intrastate telecommunications services." How- 
ever, IIA believes that it will be appropriate for the record to stress that the S. 
1086's allowance of state rate, term or condition regulation of Sec. 13 is limited to 
Intrastate offerings which do not impugn the viability of interstate services and fur- 
ther, any state public utility regulation of enhanced services would be wholly inap- 
propriate. 

Finally, S. 1086 provides that "The States may prescribe regulations implement- 
ing paragraphs (1) through (5) (obligations of telecommunications carriers) lor intra- 
state services so long as such regulations are not inconsistent with those prescribed 
by the Commission. Although states are often the first line in onsumer protection 
from competitive abuses by providers, HA also has had experience witn zealous 
state regulatory authorities disinterested in national service goals. We believe that 
it is important for the legislative record to reflect fully the intended scope of such 
state regulations. Local actions nationwide — in tax, public utility, regulatory and 
other areas — have shown that without guidance, many states can take steps that 
drive up costs and otherwise needlessly constrain the telecommunications market- 
place. 

CONCLUSION 

As we work together, as noted in Sec. 3 of S. 1086, this bill can "encourage private 
investment in, and advancement of the Nation's telecommunications 
infrastrucuture; ensure the availability of the widest possible range of competitive 
choices in the provision of telecommunications and cable television services; elimi- 
nate the existing regulatory barriers to competition in the provision of telecommuni- 
cations and cable television services; encourage interconnection and interoperability 
among telecommunications carriers; ensure the universal availability of telephone 
services; encourage the continued development and deployment of advanced and re- 
liable capabilities and services in telecommunications networics; and protect the pri- 
vacy interests of users of telecommunications services." 

Mr. Chairman, and members of the Subcommittee, thank you once again for invit- 
ing the Information Industry Association to participate in this hearing. We would 
be glad to provide more detailed comments on any aspect of this matter and to re- 
spond to any questions that you or the Committee members may have. 

Thank you. 



[Telecommunications Infrastructure Objectives and Implementation Principles 
may be found in the committee's files.] 

Senator Inouye. Thank you very much, Mr. Metalitz. 

Before I proceed with the questioning, I would Hke to assure one 
and all that your full statement will be made part of the record, 
and if you do have addendums or supplements, please feel free to 
submit them. 

Mr. Cullen, I am certain you are aware that several proposals 
have been submitted by Ameritech, Bell South, and Rochester Tele- 
phone to open the networks to competition. Their proposals vary, 
but it seems to be a response to the demand for competition. Do 
you have any proposal of your own? 

Mr, Cullen. Mr. Chairman, I am familiar with the three propos- 
als that have been made. I think they are a response both to the 
frustration we have heard here this morning and a response to cus- 
tomer requirements as well. 

On behalf of the seven RBOC's, I would say that we endorse anv 
proposal that will move us toward full competition. The Ameritech 



117 

proposal does that in an environment with which we are familiar. 
They are proposing that that be done as a demonstration, that it 
be done as a trial, and that in a period of 3 to 5 years, find in fact 
all along the way, that it be examined to determine if it has pro- 
duced the results and the benefits that are anticipated. 

We advocate full competition. We are concerned, however, about 
the issue of universal service and of essential services. In 
Ameritech, they have proposed to experiment with that, and we 
feel that that is a worthwhile approach. 

Senator Inouye. Do you think this bill will accelerate competi- 
tion and expedite it so that you can lift the ban on long distance? 

Mr. CuLLEN. Two points I guess, Mr. Chairman. One is competi- 
tion in the local exchange is a very unbalanced competition in this 
bill, whether, as Senator Packwood suggested earlier, you are 
standing on the top of the incline or the bottom of the incline. It 
puts all of the obligations and none of the opportunities with the 
regional Bell operating companies. 

Second, the relief in long distance service, where in fact as Mr. 
Smith suggested, it might create harm to the industry if we were 
allowed in, but great benefit to the consumers if we were allowed 
in; competition, as outlined in the bill for long distance, is nominal 
only, and does not even allow us to get in and resell services, which 
is a right that the long distance carries have here for local service. 

So, it is very little and creates very, very few opportunities for 
the telephone companies, who again I might underscore, because I 
do not think Mr. Smith heard it, that the local exchange companies 
have in fact invested in 4 million miles of fiber optics, which has 
nothing to do with whether it is turned on or not turned on, this 
is a substantial investment and twice that of the rest of the long 
distance business. 

Senator Inouye. New Jersey Bell and the publishers have 
reached some accord. Can that agreement be implemented nation- 
wide? 

Mr. CULLEN. Mr. Chairman, I happen to have been personally in- 
volved in that accord as well as some of the talks that are under- 
way nationally. 

The New Jersey Bell accord was excellent for New Jersey. I am 
not sure that it would be excellent in Missouri, or Alaska, or South 
Carolina, but I do think it is the basis for an agreement which in 
New Jersey we did for the sole reason of reducing the concerns ex- 
pressed by the newspaper industry so that we could go forward and 
begin to develop business opportunities. 

I would not recommend it throughout Bell Atlantic, I would not 
recommend it throughout the country, but I do recommend that we 
open these lines of communication and assure one another that we 
will have the protections that we have heard about here today for 
newspapers. 

I think as a demonstration. New Jersey will prove to be very ef- 
fective. I would just point out that it does have a sunset provision 
of 7 years. It does not apply to information services or even all elec- 
tronic publishing. It applies to the type of electronic publishing 
that is traditionally found in newspapers, and so I think it is £in 
excellent start. 



118 

Senator INOUYE. Thank you very much, Mr. Cullen. We will be 
submitting more questions, if we may. 

Mr. Wright, as you have indicated, the courts have just lifted th 
information services restrictions from Bell companies, and this bill 
would impose separate subsidiaries for electronic publishing. Are 
these safeguards sufficient? 

Mr. Wright. Mr. Chairm£in, our concern is, and I hate to use the 
term, "the plaving field," which particularly concerns small pub- 
lishers. Regardless of the incline, if you are from a small commu 
nity like Conway, MO or Boardman, OR, your total resources on 
the asset side of your balance sheet might, for example, be 
$125,000. 

You are very key to the culture of that community. And when 
you look across the playing field, even though it may be somewhat 
level, and you are fooKing at a multibillion dollar corporation or 
company that can bring one person into your community and effec- 
tively get into the information business, not only would people be 
put out of business in that community of Conway, MO or 
Boardman, OR, but you are also really disrupting the culture of 
that community and their information services. 

So that is the reason that the National Newspaper Association 
has maintained that we need assurance that everyone will have 
equal access at the most competitive rates, sir. 

Senator Inouye. I have many other questions, but I will have 
your Senator do the questioning, if I may. 

Mr. Martz, can you update us on the negotiations between pub- 
lishers and Bell? 

Mr. Martz. Sir? 

Senator Inouye. You are now in negotiations between Bell com- 
panies and publishers. What is the latest on that? 

Mr. Martz. Well, as I indicated in my statement, we are not at 
a point where we can talk about substance. But I think this is an 
indication that reasonable people are trying to sit down to see if 
we can now iron out our differences. 

I might point out that the New Jersey Bell agreement was some- 
thing that came up after the fact of the legislative process; and in 
point of fact, the legislation in New Jersey went through a lame 
duck session of the legislature, and did not have the benefits of the 
full studied focus that this committee is putting, in terms of this 
bill. 

But it is our hope, certainly, that as these talks progress, that 1 
we may be able to come forward with some recommendations for 
language that will satisfy the concerns that we have. And I think, 
if you go back to the dilemma that this committee is facing, you 
obviously are trying to balance the proper role of Government ver- 
sus the role of technology and market forces. You are also trying 
to balance the lessons of the past with the promise of the future. 

And the reality of it is that AT&T, having been broken up into 
the seven RBOC's and the slimmed-down AT&T, was done for a 
reason. And since that time, by inadvertency or otherwise, there 
have been continuing evidences of abuse. So, it is our feeling that, 
as you make this balance to get from the present of a monopoly in- 
frastructure, with one funnel where everything has to go through 
that local monopoly switch, to what we all would like to see is a 



119 

free competitive infrastructure, that we have to have appropriate 
safeguards; if, in fact, the telephone companies are going to com- 
pete with those using them. 

Senator INOUYE. Why do you have an interest in the long dis- 
tance industry? 

Mr. Martz. We do not have any position on the entrance of the 
RBOC's into long distance. Our areas of concern are first of all, 
that there is a freely competitive information services marketplace; 
and second, that there is a competitive infrastructure. 

Now, I think sometimes these two things get confused. You can 
have a competitive infrastructure, without the providers of the in- 
frastructure also providing telecommunications services. And this 
is the content conduit dilemma: That, as long as you have a funnel 
through which everything must go, whoever owns that fimnel, if 
they are going to compete with what has to go through that funnel, 
then we feel that safeguards, separate subsidiaries, separation, all 
of the kinds of safeguards that you had set forth in S. 2112, and 
are partially included in 1086, will help get us there. 

Senator iNOUYE. Thank you very much, sir. 

Mr. Smith, if this bill is successful in opening up the local ex- 
change, or the local loop, as you say, do you believe that the com- 
petition would be sufficient enough for a lifting of the long distance 
restriction that is now set forth in MFJ? 

Mr. Smith. That really remains to be seen. What remains to be 
seen is if the bill, and other forces, are successful in bringing real 
competition to the local exchange. If the day arrives when long dis- 
tance companies and consumers have access to several alter- 
natives — for example, long distance companies have access to dif- 
ferent service providers which will cut down, no doubt, on the cost 
of access. If the local exchange competition experiment is, indeed, 
successful, and there is a significant market share on behalf of the 
alternative providers, then I would say that the day would come, 
if that bottleneck is broken, then yes, there could be long distance 
entry by the Bell operating companies. 

But you have to wait for one to happen, in order to allow the 
other to happen. Otherwise, if the door is opened for long distance 
entiy now or in the next few years while there is a 99-percent-plus 
market share and access payment share by the monopoly local ex- 
change carriers, that is still monopoly. 

And you will not find out until long distance is gone, and prob- 
ably less competitive because of Bell entry and Bell inte^ation, 
you will not find out until later whether local competition is a re- 
ality or a myth. 

Senator Inouye. Mr. Cullen, did you want to say something? 

Mr. Cullen. I would to add just one or two comments, if I may. 
No. 1, the 99-percent figure, which is frequentlv discussed by 
AT&T and other long distance providers, relates only to public net- 
work and publicly reportable data. If we look in the State of South 
Carolina for example, there are 75 separate companies providing 
private systems by satellite, by microwave. There are 44 long dis- 
tance companies. So, the vast majority of the competitive inroads 
are not reported, and would not show up in these data. 

Second, when we think about the local exchange business, it is 
very important, I believe, that we think about the true nature of 



120 

this business. It is comprised of three essential elements: It is the 
pipe to the home, which can be copper, which can be fiber, which 
can be coax, or it can be wireless; second, it is comprised of the ac- 
cess charges that we are talking about here; and third, it is com- 
prised of intra-LATA, a very short distance toll. 

There is substantial competition in the short haul, short distance 
toll, substantial. There is substantial competition in access and in 
delivery. No one at Prudential or VISA or Greneral Motors or Exxon 
has the slightly problem in finding alternative providers for any 
service they choose to provide. People in the pinelands of southern 
Jersey do; people in western Virginia do. 

And so the issue is, we have a tremendous amount of competi- 
tion. But it has gone only to those areas where we have profitable 
business: Access charges; short haul toll charges. Not a lot of it has 
gone into the local loop, because most of the local loop is under- 
water; improfitable, again, by as much as 50 percent. 

I'd just close by citing South Carolina, where we have some data. 
The studies in South Carolina show that the average cost to a resi- 
dential customer for local service covers about 50 percent of the ac- 
tual cost of providing the service. The rest comes from access 
charges and short distance toll. 

So, I think it is important that we try to get the numbers as 
close as possible to accurate; and that, second, we understand the 
true nature of the local exchange business. It does have those three 
very important components. 

Senator Inouye. Mr. Smith. 

Mr. Smith. May I respond, too, since it is my figures that are 
being taken at issue. 

I definitely agree that we should look at accurate comparison, 
and figures that are not subject to redefinition or jerry-rigging, or 
anything like that. The AT&T figure is the percentage of the whole, 
the percentage of all of their access payments that are made to mo- 
nopoly local exchange carriers, and the number was 99.86 percent. 

To take one other figure — and these are total overall revenues, 
figures that are not subject to redefinition or reinterpretation or 
jerry-rigging — at the recent conference of the competitive access 
providers, there were two Wall Street analysts there; one of whom 
estimated 1992 revenues of the CAP industry as a whole at about 
$160 million. The other said it might be closer to $220 million. So, 
it is within that range. 

The income — the revenues, rather, of the Bell operating compa- 
nies was on the order of $82 billion. That figure then, is that the 
CAP industry as a whole is one-quarter of 1 percent of the Bell op- 
erating companies. Those figures are difficult to quibble with; they 
are absolute revenue figures. And to say that yes, but our core 
business is being subject to a great amount of competition, it mys- 
tifies me that the core business can be that one-quarter of 1 per- 
cent. 

Senator Inouye. Mr. Metalitz, the restriction on information 
services was just removed by the courts. As a result of that, have 
members lost business? 

Mr. Metalitz. I think there has been a lot of exciting develop- 
ment, since the information services restriction has been lifted. But 



121 

we do not think that that is the ideal situation for the development 
of more and competitive information services. 

We believe that these services would develop more robustly in an 
environment such as that outlined by your bill, an environment in 
which there are some safeguards, in which there are some stronger 
guarantees for connection to monopoly services, especially to local 
telephone services. And so, we think that that would improve the 
situation beyond where it stands now. 

Senator Inouye. Do you believe the safeguards are sufficient, as 
set forth in this bill? 

Mr. Metalttz. We have some suggestions that are set forth in 
our written testimony, about how they could be improved. We think 
there should be some more specific requirements for unbundling of 
services, for example; and some other more specific requirements 
for truly making this an open system, that any competitor can 
interconnect with. 

Senator Inouye. Thank you. Senator Danforth. 

Senator Danforth. Well, I want to thank the panel and all wit- 
nesses today for a long morning. And Mr. Chairman, one of the 
things that is encouraging to me is the fact that so many wit- 
nesses, representing so many different interests, have expressed 
the desire to work with us as we proceed with this legislation. And 
my hope is that we will proceed with this legislation. 

I do not think it is possible to please everybody 100 percent; but 
I think that there is a wide recognition of the fact that the existing 
state of affairs is really not acceptable in something that is as fast- 
moving as telecommunications. 

I am very delighted that my friend and constituent, Dalton 
Wright, is here, a man I have known for a long time. Mr. Cullen 
used the figure of speech, "underwater," to describe some part of 
the industry, but Laclede County is not underwater, at least to my 
knowledge, it is not underwater. 

I would like to ask Mr. Wright just to elaborate a bit on your 
concern. You now believe that the local newspaper business is real- 
Iv an essential enterprise, as far as the community is concerned. 
And you have a particular fear about what is going to happen. 
What is that fear? 

Mr. Wright. In small town America, where I am from, the com- 
munication within a community concerning sports, Grovernment, 
plans that the leaders of a community have, the vision and the ac- 
cessibility of it within the local community is really paramount. It 
is one of the pillars. Schools, hospitals, all the other services are 
extremely important. But unless you have the flow of information, 
unless you have the structure of people who are familiar v/ith the 
community, that can get that information and move it around, I 
think that without that, the glue that holds a town or community 
together is, in many cases, lost. 

I cannot speculate on the metropolitan areas, as to whether or 
not that has caused any decline in the values of the community or 
not; but I can say that it is important to the values of the commu- 
nities that I serve in Missouri, and the communities that the Na- 
tional Newspaper Association's members serve around the Nation. 

And it is my strong belief that, if the precarious economic condi- 
tion that a lot of small newspapers and broadcasters are in were 



122 

upset by having other information providers come in from afar and 
put in, let us say, a bureau with one or two employees; and if that 
bureau with those one or two employees were subsidized by lower 
rates because of their company's size, as compared to the Lebanon 
Daily Record, or the Conway Chronicle, or the Richland Mirror, 
this could be enough to destroy the vitality of that smaller eco- 
nomic entity. And the result would be the loss of jobs, the loss of 
the culture within the community, and the loss of the most impor- 
tant information source that small town America finds, I feel, very 

vital. 

Senator Danforth. So, you are concerned that, let us say, the 
Kansas City Star or, perish the thought, the St. Louis Post Dis- 
patch, would estabhsh a bureau in Lebanon, and that because of 
the fact that they are bigger, they would be given preferential 
treatment with respect to, to what? 

Mr. Wright. To rates, sir. And also access. Let us hypothetically 
say that, in one of our metropolitan areas that is suffering from a 
lot of water damage right now, of which the community of LeMay 
is in, if they did establish a bureau, and they had a relationship 
with a large telephone company, it would be very easy to accom- 
plish that, and secure a very low rate. There would be certain syn- 
ergy, certain economy of scale that we would have a hard time 
doing. 

But again, I think that the economics of it, if you took all the 
employees that we presently have, for example, in Lebanon, MO, 
they would be replaced by a much smaller number of people; and 
I do not believe that they would be as efficient or as effective as 
our local reporters and advertising people. 

Mr. CULLEN. Senator, may I just comment for a second? From 
the RBOC perspective, we view this dilemma as an excellent busi- 
ness opportunity for both of us, for all of us. Because with the kind 
of two-way fiber wireless coax, whatever network that we envision, 
we can offer interactive, broad band, what we call point cast capa- 
bility, that is part of a common carrier obligation that every RBOC 
has; to offer every small paper, or information service provider, 
local delivery capability. 

In fact, ultimately it can be customized information delivery to 
your home, to everyone else's home, based on your needs. Unlike 
the broadcast capability that we see today, in cable for example, 
where we are looking at proprietary networks, and if they decide 
in a cable industry, if they decide to deliver the St. Louis Post Dis- 
patch, they can do that to the exclusion of everyone else; we can- 
not. 

So, we view this as an opportunity, not only in the newspaper 
industry but, for example, in the movie and entertainment indus- 
try, just to pick another example; where we can be an alternative 
distribution capability, so that people do not need to leave their 
homes, get in a 4,000-poimd metal box, dr-ive to a store, pick up 
three movies, watch one, and pay a late fee 2 days later. 

We can offer the movie and entertainment industry the same 
sort of point cast delivery efficiently, economically, in fact we are 
beginning to trial it right across the river in northern Virginia. 

Senator Danforth, Are you concerned about this, Mr. Wright? 



123 

Mr, Wright. No, sir. Our concern is not the highway. Our con- 
cern is access to it, and the rate at which we get access. 

Senator Danforth. Access to it. And do you think that your con- 
cerns can be addressed in this legislation, without undoing the 
basic point of the legislation? 

Mr. Wright. Yes, sir. I think you can turn right there to the gen- 
tleman to your right; he has a good solution in the language of the 
Bums amendment. And I believe that the language can be worked, 
and I think it is workable. I certainly do, Senator. 

Senator Danforth. Thank you very much. Thank you, Mr. 
Chairman. 

Senator Inouye. Senator Bums. 

Senator Burns. I want to ask the Senator from Missouri if he 
wants to negotiate or renegotiate the Missouri River Compact now, 
[Laughter.] 

I do not know if the folks who come to hearings, understand it 
or not, but for years and years we have a running gun battle with 
the folks in Missouri. Of course, I was raised down there, and Joe 
sends his regards, by the way, up at Gallatin. But we have had a 
running gun battle about how much water we should take out of 
the reservoirs in Montana in order to float them silly boats down 
there in the lower Missouri. So, we have got that going all the 
time. 

Thank you very much for this panel. I am sorry I had to miss 
part of it, but, nonetheless, we have been through your testimony, 
and I had my able assistant back here writing down some ques- 
tions that we would like to clarify just for the record. 

Mr. Wright, I would start with you on the protection for the 
small information providers access. In other words, I think it is 
pretty clear if we get that language in there, then you would go 
ahead and support this bill? 

Mr. Wright. Yes, sir, I personally think that the National News- 
paper Association would support that legislation. 

Senator Burns. Mr. Martz, you are aware that the RBOC's and 
the publishers, those negotiations are ongoing now? 

Mr. Martz. Yes, sir. 

Senator Burns. Do you foresee the day when the publishing in- 
dustry takes a position in favor of long distance relief? 

Mr. Martz. Long distance relief, as I indicated in response to an 
earlier question, is something that is beyond the purview of our 
concerns. The entry of Telco's, the RBOC's into long distance is 
something that is better left to those who are concerned about that 
particular aspect. 

I think it is ironic in a certain sense that as you look at the evo- 
lution of the RBOC's desires, they will end up back in doing every- 
thing that AT&T had done before it was broken up. And I think 
this underscores that as we get from where we are now to that 
point where there is total free competition not only in information 
services and infrastructure, but in the other areas as well, that in 
that transition period there are appropriate safeguards to get us 
from where we are today to then. 

Senator Burns. And, Mr. Smith, the resale of the local telephone 
services permitted as proposed in this bill, S. 1086, should we, in 



70-334 0-94-5 



124 

turn, permit resale of long distance services by the RBOC's? If not, 

why not? 

Mr. Smith. I would say, Senator, absolutely not. Because resell- 
ing of long distance service — two things. One, reselling of long dis- 
tance service would make the RBOC's once again the gatekeeper of 
long distance service. They are proposing, for example, to mate up 
resale with something they call least-cost routing, which would ba- 
sically put all long distance companies in the position of just being 
a wholesaler to the RBOC retailer. 

Second, that would be only one step away from the RBOC's are 
actually asking for, which is full-scale long distance entry. You can 
depend that when resale — the day that resale is granted, they will 
say this is absurd allowing us only to resell when we have our net- 
works all ready to go. 

You will still have, in a case of resale, the opportunity to dis- 
criminate against the long distance carriers who do not give the 
RBOC the best deal on bulk rates, and to discriminate in favor of 
the long distance company who will offer the RBOC the best rates. 
And they will still have the only access to the local customer, the 
first mile and last mile of every call. 

Senator Burns. Mr. Cullen, would you like to comment on that 
from your perspective? Would inter-LATA relief divert your atten- 
tion from the real job at hand; namely, local infrastructure mod- 
ernization? 

Mr. Cullen. Senator, I think the two are totally consistent. We 
are not talking about separate networks. We are talking about in- 
vestment in our network, in our territory in new technology. The 
network is transparent to the kind of messages it carries, whether 
it is voice or it is data or it is video. Whether it is intra-LATA or 
inter-LATA, it is all transparent. 

The least-cost routing issue and resale that you mentioned, real- 
ly, is boiled down to one simple issue. If you look at the AT&T pric- 
ing, every 6 months changing, you will find a phenomenon for the 
last 3 years for all the other carriers, where they mirror that, and 
AT&T serves as the umbrella. It is the phenomenon that I included 
as an attachment, described in the Merrill Lvnch report. 

So, there is a pricing structure that follows AT&T. Least-cost 
routing is just a software package that the regional companies have 
proposed we be allowed to do — a very small part of the inter-LATA 
business. And it allows each customer to figure out which routes, 
which prices, which price schedule, and which carrier will meet 
their need day to day, hour to hour, week to week. 

It is tantamount to having an automatic travel agent explain the 
airline travel guide. Not very many people can thumb through that 
and find the right rate and time and destination and package. 

Least-cost routing, and even resale, will do the same thing for 
consumers — enable them to get absolutely the best deal. 

Senator Burns. Well, then, is this issue is simply one of money, 
or is it the rich versus the wealthy, or the wealthy versus the rich? 

Mr. Smith. Let me respond to that and say something about long 
distance prices. You undoubtedly have heard of Friends & Family. 
You have probably heard of 1-800-COLLECT. Those are both pro- 
grams that MCI has implemented recently. And, by all accounts. 



125 

those types of programs represent a significant departure and, in 
fact, the beginning of a price war in long distance prices. 

Long distance prices have gone down over 50 percent in real 
terms since divestiture, and that is a fact. Of course, the smaller 
carriers do price below AT&T. They must in order to get the busi- 
ness. But, to give you just a couple of statistics, local rates have 
gone way up even as long distance rates have been cut in half. It 
costs 90 percent more to make a 1-minute call from Manhattan to 
Montauk, Long Island, 75 miles away than to California, 2,900 
miles away. And to take the long distance side, in 1984, and closer 
to home, in 1984, AT&T charged $2.70 for a 5-minute daytime call 
from Washington to Los Angeles. Now, that charge is not $2.70, it 
is $1.25. And the smaller carriers charge, as everybody agrees, 
even less. 

That is real competition. 

And when you compare the history of the what the long distance 
carriers have done, prices going down, down, down, and the local 
exchange carriers' prices going up, up, up, it is pretty clear that it 
is not the rich versus the wealthy. It is just the rich. 

Mr. CULLEN. Senator, may I just comment briefly? I do not want 
to get into quarrels here, but I guess we are already into quarrels, 
so I will continue it. [Laughter.] 

Senator Burns. We will call it a discussion for today. 

Mr. CULLEN. A discussion, yes, sir, dialog. 

Every dollar of long distance reduction since 1984 is more than 
accounted for not by anything the long distance carriers have done, 
but by the absolute reduction in prices charged by the local ex- 
change companies to the long distance carrier to carry their mes- 
sages. 

This is not a relic of regulation. This is high-value service, and 
a very effective, very low price we charge the carriers. We have re- 
duced those charges every year by several hundred million dollars. 
That is what is being passed along in long distance rates. 

In fact, as I said earlier, it is not even all being passed along. 
We reduced our rates to AT&T by $250 million on July 1. They did 
not pass along a penny of that reduction to their customers in 
lower rates. So, the issue here is an important issue, and it has to 
do with why long distance rates came down, who is accountable for 
it and what role the local exchange companies played in supporting 
that. 

Mr. Smith. Can I just add that I would welcome an analysis of 
the ratio of access rate reductions to long distance price decreases. 
I am confident of the way it would turn out, because last summer, 
Chairman Markey on the House side held a hearing and the wit- 
ness, who was a professor from Berkeley who was under contract 
to the regional Bell companies, agreed that access rate reductions 
accounted for a significant part, but far from all, of long distance 
rate reductions. So, it is simply not the case. 

I cannot speak for AT&T, I do not represent AT&T. But long dis- 
tance prices have gone down by more than simple access rate re- 
ductions, and I would welcome an analysis to that effect. 

Senator Burns. Well, as we start making policy on this, and I 
think with the information that you have given us today we can 
sort of sift through it and get where I think the chairman wants 



126 

to go with this legislation, and I think where we want to go as pol- 
icymakers, and make some things happen in telecommunications. 
And all of this has to be considered as we go along the way before 
we can make any kind of a decision. 

Mr. Cullen, I notice that you did not predominantly mention the 
cable Telco relief in your oral testimony. Do you feel pretty con- 
fident about your lawsuit in Federal court, or was it just an over- 
sight? [Laughter.] 

Mr. Cullen. No, we do feel confident, based on the oral argu- 
ment, but we also support the direction here. And it is not so much 
that this would be an excellent business opportunity for us, it is 
that we are listening to consumers. And consumers understand 
why their cable TV service is out much more fi^equently than their 
telephone service. 

So, if we polled consumers and asked them whether they want 
a choice, this would be a slam dunk answer fi-om them, and we are 
reflecting that. Our only concern in this particular area of the bill 
is that there seem to be a number of, I will say, bureaucratic re- 
quirements before we can get into the cable industry. 

And so, except for that, we certainly do support our entry into 
cable entertainment, video services, programming, and content 
business. And I may just comment that we heard earlier discussion 
which said we are investing so much today that we really do not 
need that in order to provide an investment. That is simply not 
true. We are investing a considerable amount today. But, to make 
that investment more attractive to meet the needs of our customers 
for full-service providers, both long distance, cable and then, of 
course, manufacturing, will be excellent incentives for the regional 
companies. 

Senator Burns. Well, we look forward from — ^we will probably 
have other questions. And I would ask the chairman if it would be 
all right if we can correspond with these people and have some 
questions for the record in response as we move this along? Be- 
cause, philosophically and basically, we have been talking about 
this a long time. We were talking about Telco entry and the revital- 
ization of our information infrastructure — sort of like the old song, 
you know, we were country when country wasn't cool. And so we 
started down this road 3 years ago. 

I think what we have done is we have elevated the level of dia- 
log, Mr. Chairman, to the point where I think we can start making 
some decisions. I appreciate the efforts that the chairman has 
made on this on the way we can work on it, to make it good for 
everybody we would hope. And I do not want the Grovemment to 
get in this business of picking winners and losers, I want this Na- 
tion to win. That is who I am looking for, and the people of my 
State of Montana. 

So, I thank the chairman very much. 

These folks probably want to go to lunch. I am just guessing, of 
course. 

Senator Inouye. We have passed the lunch hour. [Laughter.] 

Senator Burns. Well, they can make it to dinner now. 

Senator Inouye. I would like to thank all of you very much. After 
conferring with the author of this measure, Mr. Danforth, the 
record of the proceedings will be kept open for 2 weeks, until July 



[ 127 

28. This should indicate that the subcommittee is very serious 
about this bill. 

In 2 weeks, we will begin assembling ourselves and preparing 
ourselves for the markup. We hope to have a markup of this meas- 
ure before the August recess. So, may I, in the strongest terms pos- 
sible, invite you to submit supplements or addenda if you do have 
any to your testimony, and to keep close tabs with the staff. The 
staff has been geared and prepared to expedite this matter. 

So, with that, I thank you all, once again, for your patience and 
for your assistance today. 

Thank you. 

[Whereupon, at 2 p.m., the hearing was adjourned.] 



S. 1086, THE TELECOMMUNICATIONS 
INFRASTRUCTURE ACT OF 1993 



WEDNESDAY, SEPTEMBER 8, 1993 

U.S. Senate, 
Subcommittee on Communications of the 
Committee on Commerce, Science, and Transportation, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 9:30 a.m., in room 
SR-253, Russell Senate Office Building, Hon. Daniel K Inouye 
(chairman of the subcommittee) presiding. 

Staff members assigned to this hearing: John D. Windhausen, 
Jr., staff counsel and Kevin M. Joseph, professional staff member; 
and Regina M. Keeney, minority senior staff counsel, and Mary P. 
McManus, minority staff counsel. 

OPENING STATEMENT OF SENATOR INOUYE 

Senator Inouye. First, my apologies for being late. This morning 
we consider the bill, the Telecommunications Infrastructure Act of 
1993, S. 1086. 

I am pleased that we have so many distinguished witnesses this 
morning prepared to offer their comments on this bill. And I am 
encouraged by the strong interest and response shown by the par- 
ties who have testified and submitted comments so far. 

We received a number of suggestions for improvement to this bill 
after the first hearing, and I want to encourage everyone to con- 
tinue to work with Senator Danforth and the staff on this matter 
as we move along this process. 

I would like to take a minute to summarize what I learned from 
the testimony delivered at the first hearing on July 14. First, I 
think all of us will agree that there is virtually unanimous agree- 
ment that the Congress has a special responsibility to enact legisla- 
tion to upgrade the Nation's telecommunications infrastructure in 
this Congress. 

Consumers, doctors, teachers, bankers, manufacturing compa- 
nies, telephone companies, and many, many others all support leg- 
islation to promote advanced telecommunication services and capa- 
bilities. And Congress should not and will not shirk its responsibil- 
ities in this area. 

Second, there is wide agreement that there should be greater 
competition in the market for communication services. Competition 
is the best means to promote infrastructure development. 

Competition has already been introduced in the markets for tele- 
phone equipment and information services, and in long-distance 

(129) 



130 

services, with outstanding results. Prices have fallen, innovation 
has risen, and consumers and the economy have profited. 

In part because of this experience. Congress last year enacted a 
landmark cable bill whose primary objective was to promote great- 
er competition to the cable industry. Even the telephone companies 
who once decried the growth of competition for local telephone serv- 
ice have acknowledged that such competition is inevitable. 

Ameritech, one of the seven regional Bell operating companies 
from whom we will hear this morning has already filed a proposal 
to open up this network to permit greater interconnection by com- 
petitors. 

The Rochester Telephone Co., Nynex, Bell South, and Pacific 
Telesis have also announced plans to open their markets to com- 
petitive forces. In short, experience has shown that competition 
benefits consumers and industry alike. Indeed, if not for the dives- 
titure of AT&T in 1984, many of the companies represented at this 
hearing would not exist. 

A third lesson I believe all of us have learned, however, is that 
competition is not to be confused with deregulation. As the FCC 
knows all too well, the removal of barriers to competition in any 
market does not guarantee that a truly competitive market will im- 
mediately exist. 

The effort to allow competition to develop at times requires 
greater regulatory scrutiny than ever to ensure that dominant pro- 
viders of certain services do not take excessive advantage of their 
market power to thwart the gfrowth of competition. Mr. Chairman, 
your comments, please. 

OPENING STATEMENT OF SENATOR ROLLINGS 

The Chairman. Good morning. I appreciate, Mr. Chairman, your 
chairing this second hearing on S. 1086, the Telecommunications 
Infrastructure Act of 1993. I also welcome our witnesses today and 
thank them for assisting the committee in this important debate. 

As I said at the last hearing, I support competition. However, I 
do not support wholesale deregulation. Telephone service providers 
must operate with a view toward the public interest, convenience, 
and necessity. Competition in this industry must not be uncon- 
trolled, unfair, or detrimental to the consumer. I agree with Chair- 
man Inouye that these issues must be looked at, especially when 
the structure of the industry continues to change at a tremendous 
pace. The changes that have occurred since the last hearing are as- 
tounding — AT&T has announced a merger with McCaw Cellular, 
the largest cellular company in the country, and a Federal court 
has overturned, as a violation of the first amendment of the Con- 
stitution, an act of Congress prohibiting telephone companies from 
providing cable service. 

We as policymakers have a delicate balance to achieve between 
imposing necessary regulation and allowing the benefits of competi- 
tion. With regard to telecommunications regulation, these ques- 
tions impact every one of our constituents everyday. I will study 
the record of these hearings carefully and continue to monitor de- 
velopments in the industry. I look forward to the testimony of the 
witnesses today. 

Thank you, Mr. Chairman. 



131 

Senator Inouye. Thank you, Mr. Chairman. We heard from a 
number of witnesses at the first hearing, and we will hear from 
several more today. We believe that regulation can at times be es- 
sential to allow a truly competitive market place to develop. 

The purpose of this hearing is to build on the lessons of the first 
hearing and to work more closely to develop a consensus on this 
bill. 

This hearing will also explore a number of recent developments 
and new issues that the committee has not yet addressed. For in- 
stance, I am certain that AT&T's acquisition of McCaw, the court 
ruling overturning the cable telephone ban, and the Bell company's 
desire to enter the long-distance business will receive a good bit of 
discussion this morning. 

Several other witnesses have concerns about S. 1086 the commit- 
tee has not yet had an opportunity to consider. And I wish to thank 
in advance the witnesses for their efforts to educate the committee. 

Before we call upon the witnesses, I would like to announce that 
we have a long day planned. And I wish to assure those who have 
been invited to testify that all of your issues are important to the 
committee and we will give you our full attention. 

I would like to now call upon the author of this measure, Senator 
Danforth. 

OPENING STATEMENT OF SENATOR DANFORTH 

Senator Danforth. Mr. Chairman, just two brief comments. And 
thank you very much. Thank you for your leadership and your dili- 
gence in holding these hearings. Two thoughts come to mind, and 
I think they both are increasingly clear, to me at least, and have 
become even more clear over the last month. 

The first is that times are changing. And, in communications, 
times are changing very, very rapidly. The policies that existed 
years ago and the policies that exist today were devised in an en- 
tirely different age as far as communications are concerned and, 
therefore, those policies must be reviewed. Inertia is not sufficient 
in an age of rapid change. 

And the second brief point that I would make is that just as na- 
ture abhors a vacuum, so do Federal courts abhor a vacuum. That 
is the lesson of the last month. And it is not particularly a new les- 
son in the field of communications. 

And we have had this industry basically regulated by a Federal 
judge. And we have sworn for years that that is not right, that this 
is not something that should be left to the judiciary, that if policy 
is to be made. Congress should really take the lead in making pub- 
lic policy. 

Again it seems that with changing times the vacuum is being 
created, and that vacuum provides the temptation for the Federal 
courts. So, for these reasons, I think that it is particularly urgent 
that we in this committee move forward and that we move forward 
very rapidly. 

And I continue to hope that by the end of this session in this 
Congress we will be in very good shape to see legislation actually 
reach the statute books by the next session. 



132 

Senator Inouye. Well, I would like to assure the author of this 
measure that I will do everything possible to bring that wish to 
fruition. Senator Pressler, do you have any statement? 

OPENING STATEMENT OF SENATOR PRESSLER 

Senator Pressler. Thank you very much, Mr. Chairman. I would 
like to commend Senators Danforth and Inouye for their leadership 
on this matter. 

Let me say that I think those two gentlemen have a great deal 
of standing in the Senate and they can make this bill pass. It is 
going to need some changes, but I salute them for their leadership. 
They are going into a very difficult area. 

Let me tell briefly of an experience I had recently. I met with the 
mayor and city council of Aberdeen, SD, and the first subject they 
brought up was that they needed an upgrade of the telephone com- 
panys digital switch in their community. 

We are living in a era when the first subject brought up to a Sen- 
ator is the need to improve the telecommunications capability of 
the town in order to attract new industry, utilize their hospital fa- 
cilities in connecting with bigger cities, have their universities and 
educational institutions in touch. 

So, people are very aware that there is an information super- 
highway. They want to be on it. We cannot have a two-tiered sys- 
tem. We live in an era when mayors of towns, in meeting with 
their Senators, ask first for help in getting an upgrade of the digi- 
tal switch or the long-distance company point of presence. That 
shows the need for this legislation and for us addressing these com- 
plicated issues. 

Universal service has always been the touchstone for this Na- 
tion's telecommunications policies. Both Federal and State policy- 
makers have tried to ensure that the benefits of communications 
technology are available to all citizens. 

As Congress develops policies to encourage further modernization 
of our telecommunications networks we should ensure that im- 
provements will be shared by all. We should upgrade the entire 
network. We should not create a two- tiered system of haves and 
have nots. 

S. 1086 is designed to stimulate private investment in our Na- 
tion's telecommunication networks by opening the local loop to 
competition. Recent history shows that competition can spur infi-a- 
structure investment. 

Faced with stiff competition in the long-distance market, AT&T 
accelerated optical fiber deployment and wrote off billions of dollars 
in older plant. Similarly, the opportunity to provide new services 
has encouraged investment in new technologies. 

Let me say that this is happening all over the world. I recently 
met with Bill Warrick of AT&T in Hong Kong and discussed their 
efforts to invest in China. But we must also remember the parts 
of our own country that are not on the superhighway. This is one 
purpose of this hearing today. 

Mr. Chairman, I have a longer statement to submit for the 
record. I care about the quality and the diversity of services avail- 
able in small States such as South Dakota. If access to the informa- 



133 

tion highway becomes an essential means of fully participating in 
society, we may need to redefine universal service. 

I mentioned that I have been working with leading citizens in my 
State to bring them state-of-the-art telecommunications facilities. 

Our small towns that are developing new businesses and new in- 
dustries need an up-to-date digital switch and point of presence to 
get on that superhighway. 

Our smaller universities, colleges, and hospitals need the same. 
So, Mr. Chairman, I want to join in this effort. I commend you very 
much. 

[The prepared statement of Senator Pressler follows:] 

Prepared Statement of Senator Pressler 

Mr. chairman, thank you for holding this second hearing on S. 1086, the Tele- 
communications Infrastructure Act of 1993. This bill represents a significant initia- 
tive designed to accelerate private investment in our nation's telecommunications 
networks. I commend you and the distinguished Raning Member of the Commerce 
Committee, Senator Danforth for your outstanding leadership. S. 1086 is a tribute 
to your bipartisan cooperation and tireless efforts to craft legislation in a com- 
plicated area. It's a good start. 

Infrastructure surely is the "buzzword" of the 1990s. Traditionally, the term pri- 
marily was used to describe our transportation networks — moving people and prod- 
ucts. Today the word "infrastructure" more often refers to cable, phone and satellite 
networks transporting information and ideas at the speed of light. Advanced tele- 
communications networks promise to change the way we work, educate our children, 
provide health care, and spend our leisure time. 

Who will deliver these new services? Every day seems to reveal another strategic 
alliance between multi-billion dollar companies seeking to spearhead the delivery of 
services over the information superhighway. Earlier this year US West announced 
a $2.5 billion partnership with Time Warner, Inc.'s entertainment and cable busi- 
nesses. More recently, AT&T announced plans to purchase McCaw Cellular Conmiu- 
nications for $12.6 billion in stock. With all this economic activity, some may ques- 
tion whether Congressional action is needed. I believe it is. 

Technological change is outpacing our existing regulatory framework. Policies de- 
signed for disparate specialized industries do not seem to make sense if multiple 
providers can offer comjjeting services. Yesterday's rules may impede deliver/ of to- 
morrow's services. Congress has an opportunity to frame a policy for accelerating 
investment in the information superhighway. Our challenge is to ensure all Ameri- 
cans have access to an on-ramp. 

Universal service always has been the touchstone for this nation's telecommuni- 
cations policy. Both federal and state policymakers have tried to ensure that the 
benefits of communications technology are available to all citizens. As Conp^ss de- 
velops policies to encourage further modernization of our telecommunications net- 
works, we should ensure that improvements will be shared by all. We should up- 
grade the entire network. We should not create a two-tiered system of haves and 
have-nots. 

S. 1086 is designed to stimulate private investment in our nation's telecommuni- 
cations networks by opening the "local loop" to competition. Recent history shows 
that competition can spur imrastructure investment. Faced with stiff competition in 
the long distance market, AT&T accelerated optical fiber deployment and wrote off 
billions of dollars in older plants. Similarly, the opportunity to provide new services 
has encouraged new technologies. Bell telephone company joint ventures in the 
United Kingdom pioneered delivery of telephone services over cable systems. 

Although S. 1086 relies primarily on competition to bring new technologies and 
services to the consumer marketplace, it anticipates the limitations of market forces 
in particular circumstances. First, the proposal addresses the need to ensure that 
competition does not endanger universal service. All carriers would be required to 
contribute to the universal availability of affordable phone service. Second, the bill 
acknowledges that competition alone may not bring the benefits of new technologies 
to rural markets. Third^ the proposal anticipates that telephone company dominance 
in the local telephone market may require certain safeguards. 

We need to examine carefully what effect local competition will have on universal 
service and the availability of advanced telecommunications services in small cities, 
towns and rural areas. I am concerned with access to affordable phone service. 1 



134 

care about the quality and diversity of services available in small states like South 
Dakota. If access to the information superhi^way becomes an essential means of 
fully participating in society, we may need to redefine universal service. 

I have been working with leading citizens in my state to bring state of the art 
telecommunications facilities to Aberdeen and northeastern South Dakota. This area 
of the state has been losing population in recent years. What can be done to reverse 
this trend? It's a two word solution: economic development. Community leaders have 
been working hard to attract new businesses. Their efforts make dear that an ad- 
vanced telecommunications infrastructure is a necessary ingredient for new eco- 
nomic opportunities. I look forward to working with Members of this Committee to 
develop a sound policy framewoik for bringing teleconmiunications advances more 
rapidly to all Americans. 

Senator Inouye. Thank you, sir. Senator Bums. 

OPENING STATEMENT OF SENATOR BURNS 

Senator Burns. Thank you, Mr. Chairman. I too want to con- 
gratulate you for bringing this issue forward. As you know, we 
have been in this issue ever since the first day I walked into the 
U.S. Senate. 

And if you go home and talk — like Senator Pressler said about 
South Dakota — all you have to do is go home and talk to your 
smaller towns and cities, because all of Montana is rural — that this 
infrastructure, this part of the infrastructure is vital to the sur- 
vival of our rural communities. 

We cannot attract new and adventurous ideas to our rural areas 
unless we have this infrastructure, the ability to move information 
with the speed of light, the way we educate our children, the way 
we deliver health care rurally, and also what it creates in our inner 
cities. 

Those areas that have the tiny tax bases are utmost in this Con- 
gress. And Congress since the last 4 years has sort of sat on the 
sidelines and allowed this to happen. 

The developments of the last 30 days, let alone the developments 
of the last year are very indicative of what is to happen in tele- 
communications in this country, and what I would like to think 
started with me 4 years ago. 

But there are a couple of questions about this piece of legislation, 
and I will offer some amendments to it. I think there are two is- 
sues that should be addressed in this piece of legislation and that 
is, the provision for access of information networked to all America, 
all Americans, no skimming, including rural and inner city urban 
areas and more importantly, existing information providers. 

And also, safeguards, or fireballs if you will, to preclude anti- 
competitive activity by dominant carriers. I think those are the two 
areas that we have to dwell upon as we hear from our witnesses 
today. 

Mr. Chairman, I have a markup in the Appropriations Commit- 
tee starting right now. And I have some questions, especially for 
the first panel. So, I will keep my remarks to that. 

And thank you for your leadership in this area, and Senator 
Danforth. I look forward to working with you, because I think there 
is no other piece of legislation that is any more important to this 
country, and especially this committee, than this piece of legisla- 
tion right here. 



135 

I intend to cooperate fully with you to make sure it gets enacted. 
And I thank you. And I apologize if I have to get up and leave and 
come back. Thank you. 

Senator Inouye. Senator Stevens. 

OPENWG STATEMENT OF SENATOR STEVENS 

Senator Stevens. Mr. Chairman, I support the concept of this 
'bill, because of its strong emphasis on universal services. I would 
remind the committee that when I came to the Senate the tele- 
phone service in Alaska was — it was presented by the U.S. Army. 

Mr. Chairman and I have worked together now for a series of 
years to assure that we extended not only modem communications 
but computerative communications into Alaska. 

And I have supported this bill primarily because of revisions on 

f)age 11 I would urge all of you to take a look at it, beginning on 
ine 11. 

The States may prescribe regulations implementing paragraphs one through five 
for intrastate services so long as such regulations are not inconsistent with those 
prescribed by the conunission. Universal service, the role of telecommunications car- 
riers. All telecommunications shall contribute to the preservation and advancement 
of uniform services. The States, in coordination with the Conmiission shall ensure 
the preservation and advancement of universal services. Assistance to certain per- 
sons in administering this subsection the States and Commission shall have with 
regard to actually assisting in individuals or entities that cannot afford the cost of 
the telecommunications service or equipment. 

My footnote would be to ask that you put in the record here the 
article from The Wall Street Journal yesterday, "The Lessons of 
AT&T's Cellular Move." 

And I raise the question for you: How can we assure universal 
services if the rights of the States to regulate, to assure that uni- 
versal service is achieved is obliterated by this legislation. 

I will support the legislation, but I urge you to keep in mind that 
rural America requires that the States maintain a role in assuring 
telecommunications delivery on a uniform basis. Thank you. 

Senator Inouye. Thank you, sir. Senator Ford. 

OPENING STATEMENT OF SENATOR FORD 

Senator Ford. Thank you, Mr. Chairman. I, too, want to com- 
pliment you and Senator Danforth for bringing this legislation for- 
ward. And I have listened to my colleagues talking about small 
town, rural America. 

And we have a witness this morning, Billy J. Ray, who is a 
friend of mine. I know him very well. And I nope you will listen 
to the Glasgow story, because it is, I think, significant for small 
communities and what they have been able to do. I think he brings 
something that we all want and something that we should listen 
to. 

And second, Mr. Chairman, after Senator Danforth moved all of 
those who stood in line for this hearing away from his office and 
downstairs, I have them all. [Laughter.] 

And I think you could not have delivered a message this morning 
anywhere in Washington, DC, because they were all from the sec- 
ond floor to the basement, imtil it started raining outside. 

They were even standing in line carrying their bicycle wheels. I 
don't mind that. But Senator Stevens and I have been innovative. 



136 

And so we think maybe next time we have a hearing like this, and 

all the money is going to be so that we are going to auction off 

space. [Laughter.] 
And then we will try to reduce the deficit. [Laughter,] 
Mr. Chairman, I look forward to this next auction. And we will 

see how many messengers come and bid. [Laughter.] 
Senator Inouye. I think that is a good idea. Senator Lott. 

OPENING STATEMENT OF SENATOR LOTT 

Senator Lott. I am anxious to hear the panels, and so I would 
like to defer at this time. 
Senator Inouye. Senator Mathews. 

OPENING STATEMENT OF SENATOR MATHEWS 

Senator Mathews. Mr. Chairman, I have no opening statement 
this morning, except to compliment the committee chair and the 
ranking member in bringing this matter to the discussion stage, 
where it seems to me that we are deploying this technology where 
we better be careful that we do not throw the baby out with the 
bath water. 

Developments are coming about so fast that is it difficult to keep 
up with where we are and why we are where we are. And I just 
look forward to participating in the discussion and helping to shape 
this legislation. Thank you. 

Senator Inouye. Thank you, sir. Senator Breaux. 

OPENING STATEMENT OF SENATOR BREAUX 

Senator Breaux, I, too, commend you, Mr, Chairman, and Sen- 
ator Danforth, for bringing the legislation to the attention of all of 
the Members, and obviously all of the affected industries that are 
out there, 

I have looked over the testimony. It sort of reminds me of— the 
theme perhaps could be, for the hearing, something along the lines 
of let me in vours, but stay out of mine. 

I think what we are saying is, all of the witness feel that they 
are being restricted, and they want to get into other areas that 
they are not allowed by congressional regulations to get into, but 
they do not want anybody to come into what they are doing. 

That is the complaint we have been having and will continue to 
have, I guess, since 1934. I suggested a long time ago a tele- 
communications commission, which would really look at all of this 
and make a nonpolitical recommendation based on size and tech- 
nology, and then let Congress make the political cut after we had 
the recommendations from a panel of experts as to what is the best 
for technology and science and industry of communications. 

And then take that recommendation and then make the societal 
and social and political decisions that we have to make. I am just 
really fearful that what we are doing is giving a little, but taking 
a little. 

And we lose the overall theme of what is best for communica- 
tions policy. And that is the real challenge we have. I commend you 
and look forward to the witnesses' presentation. 

Senator Inouye. Thank you. Senator Packwood. 



137 

OPENING STATEMENT OF SENATOR PACKWOOD 

Senator Packwood. Mr. Chairman, thank you. I have a certain 
sense of deja vu as I look at this problem. I think this is going to 
be an ashes-to-ashes situation. 

I think in 10 years we will be where we perhaps were in 1927 
or 1928 when we passed the Federal Ratings Act to allocate fre- 
quencies because they were overlaying each other. And that is all 
we did. 

I can picture universal service, extraordinary competition within 
areas, and all that we will have to do is to make sure that fre- 
quencies do not overlay each other. And maybe some modicum to 
guarantee universal service. 

I can even picture science advancing far enough on the fracturing 
of the frequencies that we might not have to allocate them other 
than to protect them as you would a copyright or a patent or a 
trademark, that they would be so numerous. 

Some of the issues we are going to consider are old issues. We 
have been around and around the track on the telephone entry into 
cable. We have been around and around the track on the modified 
final judgment in manufacturing and what should we do. 

We have got some new issues — opening up the local telephone 
company into competition. We have not faced that before. We have 
got some minor long-distance issues in this bill. 

But I hope we all are agreed on where we would like to come out. 
I mean, we would like to nave universal service and universal com- 
petition and that we do not pass a bill that may deter rather than 
encourage that. 

This is an opportunity for a once in a decade bill. And I hope that 
we do not rush through it too quickly, and make a mistake, £ind 
slow down what I think is inevitably coming. 

I might say, the Oregon Legislature this year — and I have to give 
them credit — passed a bill that opens up the local telephone service 
to competition. And a competitor does not have to provide it in the 
entire service area. 

He can pick out a competitive zone. But then, in that zone, the 
local telephone company can go head to head on price, does not 
have to file its rates or services with the public utilitv commission, 
and we are going to have very quickly some head-to-head competi- 
tion with the local telephone company. 

And that agreement was reached between the Oregon Public 
Utilities Commission, AT&T, US West, MCI, GTE, and a company 
called Electric Lightwave, which is a competitive access provider. 
They all agreed. 

And so we are going to be into the competitive local telephone 
communication systems service soon. Would, that we could reach 
the same agreement among the same parties here. 

Senator Inouye, Thank you. Before I call upon the first panel, 
I am going to advise my colleagues that if I look a bit flustered, 
I hope you will understand. I am presently testing out a high-tech- 
nology communications system, a hearing aid. [Laughter.] 

And I am hearing sounds that I have never heard. [Laughter.] 

Senator Breaux. Is that long distance or just local service? 
[Laughter.] 



138 

Senator Inouye. But it does help. So, with that I would like to 
call upon the first panel. If I am speaking too loud or [Laugh- 
ter.] 

The chairman and chief executive officer of AT&T, Mr. Robert E. 
Allen; the chairman and chief executive officer of Ameritech, Mr. 
William L. Weiss; the chairman of the Electronic Frontier Founda- 
tion of Cambridge, Mr. Mitchell Kapor; and the vice chairman of 
Corning, Inc. of New York, Mr. David A. Duke. 

Needless to say, we have a most impressive panel, all heavy hit- 
ters. I would like to advise the panel that this is the best attend- 
ance we have had of this subcommittee, I believe, in the last 10 
years. So, I hope you will realized that we all consider your testi- 
mony to be extremely important. May I first call upon Mr. Allen? 

STATEMENT OF ROBERT E. ALLEN, CHAIRMAN OF THE BOARD 
AND CHIEF EXECUTIVE OFFICER, AT&T 

Mr. Allen. Thank you, Mr. Chairman. First of all, Mr. Chair- 
man, I would like to commend you and Senator Danforth for intro- 
ducing S. 1086. 

It recognizes the real importance of the telecommunications in- 
fi*astructure to the Nation, second, the importance of competition in 
enhancing the capabilities and the value of the infrastructure, and 
perhaps most significant, it provides a framework for testing the 
competition in the one market in the telecommunications industry, 
that has remained an entrenched monopoly, and that is the provi- 
sion of local phone service. 

Although my file testimony outlines some additions and suggests 
some changes that we believe are important, I applaud the thrust 
of the bill and the lion's share of its provisions. 

As we contemplate the future of this important industry, we en- 
vision an information age, products and services, that revolutionize 
the way the we live, dramatically changing the way we deliver edu- 
cation and health care, the way we run our businesses and the way 
we entertain ourselves. 

But we cannot be starstruck by the galaxy of possibilities that 
technology promises. We have to deliver the full benefits of infor- 
mation technology to the Nation. We have to deliver the vision of 
the Information Age. 

Turning this vision into reality means even more changes in the 
telecommunications industry. The experience of the last decade in 
the long-distance business gives an important guide for the future. 

Competition has transformed the long-distance business. While 
competitive policies have been smoldering for years, the breakup of 
the Bell System, ignited the marketplace. And when the Bell Sys- 
tem's local monopoly was separated from long distance and manu- 
facturing, the competition really began to flourish. 

Since then, competition in the long-distance business has created 
wider choices, more innovation, higher quality, and lower prices. I 
do not think the American public would want to turn back the 
clock. 

Long-distance commimications superhighways are world class 
and getting better. And the reason is simple. It is competition. The 
time has come to see if we can get the same benefits by introducing 
competition in the local telephone business. 



139 

There is no local phone competition now. Virtually every person 
in this country must answer "No" to the following two questions: 
Do you have a choice of companies for local telephone service, and 
can you switch to another company to get better service or better 
prices? 

You compare that to long distance where 16 million customers 
switched long-distance companies last year, in 1992, where 9 or 
more companies offer service in 45 of our 50 States, where 81 com- 
panies offer service in 4 States, and customers in virtually every 
household in every State, rural and urban, can chose among sev- 
eral companies. 

Much is being written about what telephone companies, cable 
companies, and others may be capable of doing and what they may 
be permitted to do. But no one should confuse what might be and 
what could be with what is. 

What exists now is essentially what existed in 1984, a local tele- 
phone company monopoly. Today there are too many barriers to 
entry in the local telephone market and too many obstacles to test- 
ing what the real competition can develop. 

The FCC and a few States have removed some of these barriers. 
But it will take the kind of provisions contained in S. 1086 to pro- 
vide the freedom and the incentives for new carriers to try to make 
it in the local telephone market. 

This might be a good time to set the record straight on some 
misperceptions about cellular calls and the proposed AT&T-McCaw 
merger. And I think this chart will help make it clear. 

Ninety-nine percent of all cellular calls go through the local tele- 
phone company facilities. Only the tiniest fraction, mostly calls be- 
tween cars within a cell — as you see there on the left or on the 
right at the bottom, only a small fraction avoid that bottleneck 
called the local telephone network. 

In short, without the local telephone company, there is virtually 
no cellular service, either provided by the wireline or the 
nonwireline carriers. For people who claim that the AT&T-McCaw 
merger would cut out the phone companies do not know what they 
are talking about. 

It is not true today and it will not be true for the foreseeable fu- 
ture, if ever. AT&T has no designs — I repeat, no designs — on get- 
ting back into the local telephone exchange business. 

But the local telephone companies want to get into the long-dis- 
tance business, even though they are still monopolies, and control 
access to the customer. When real competition breaks the RBOC's 
bottleneck, concern about monopoly abuse should end. And the 
RBOC's should then be free to enter the long-distance market. 

Competition has made AT&T a much better company, more effi- 
cient, more innovative, more responsive to customers. Not perfect 
by a long shot, but much better. And I dare say that competition 
would do the same for local telephone companies. 

The companies would benefit. The public would benefit. And I 
think the Nation would benefit. The economic vitality of America 
will depend in part on the capabilities and the efficiency of this 
communications and information infrastructure. 



140 

We have learned that competition and monopoly do not mix. And 
we have learned that competition is the best safeguard for cus- 
tomer interest and the best guarantor of innovation and value. 

The task ahead is to apply these lessons throughout the commu- 
nications industry for the good of the industry and for the good of 
the Nation. And that is why, subject to the important modifications 
described in my written testimony, AT&T is prepared to support S. 
1086. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Allen follows:] 

Prepared Statement of Robert E. Allen 

Mr. Chairman and Subcommittee Members: My name isRobert E. Allen. I am 
Chairman of the Board and Chief Executive Officer of AT&T. I appreciate the oppor- 
tunity to comment on Senate BUI 1086, the "Telecontununications Infrastructure Act 
of 1993," and on the broader issues that underlie it. We are encouraged that S. 1086 
has embraced the pro-competitive message that has been the theme of evolving tele- 
conmiunications policies in this country for the past 25 years. In particular, we be- 
lieve that competitive forces can spur the delivery of the most advanced voice, data 
and multimedia services to America's citizens in the shortest time frame, without 
burdening taxpayers or consumers with unnecessary costs. A competitive market 
structure throughout the telecommunications industry will attract private invest- 
ment and entrepreneurial activity, at a pace and degree that the marketplace sets 
and demands. We therefore applaud the Subcommittee's efforts. Subject to the im- 

I)ortant revisions outlined later in my testimony, AT&T is prepared to support the 
egislation. 

For telecommunications to evolve into a fully competitive marketplace, govern- 
ment action is needed at three critical stages. First is the role of government in for- 
mulating a vision for a competitive national telecommunications infrastructure. Sec- 
ond is the plan by which the private sector can be challenged (and encouraged) to 
fulfQl that policy. Last is the need for government to step out of the way once effec- 
tive competition has developed in the market, so that competition will continue to 
flourish unhindered by artificial government restraints. 

'The nation's past experience with competition in the communications equipment 
and long distance markets is a testament to the benefits consumers can expect from 
a competitive local service marketplace. The customer premises equipment market 
was the first and easiest to become competitive. Once the FCC determined two dec- 
ades ago that other manufacturers' terminal equipment should be allowed to be 
used with the Bell System network, the options available to customers proliferated. 
Instead of having a single, expensive black rotary phone as in the past, homes today 
routinely have several phones (both wired and cordless), an answerine machine, a 
computer with a modem, and maybe even a fax or cellular phone — all made by a 
variety of manufacturers, U.S. and foreign. (Jovemment no longer regulates the 
price of customer equipment or the terms of its sale; its only involvement is partici- 
pating with industry to develop technical standards. 

The U.S. telecommunications network equipment business has also become fully 
competitive. Before divestiture, the BOCs purchased their networit equipment from 
their Bell System manufacturing affiliate. But once the Decree severed that caotive 
relationship, new suppliers with fresh ideas entered the msu-ketplace. The RBOCs 
now have tne ability and the incentive to establish multiple sources of supply, which 
they have done, and to buy their equipment from the manufacturers that offer the 
best combination of features and price. 

In the 11 years since the Decree was announced and new conditions such as equal 
access spurred competition in the long distance markets, there has been extraor- 
dinary growth there as well. Hundreds of new carriers have begun providing com- 
peting long distance services at lower prices. Thousands of miles of fiber optic cable 
have oeen put into service across the country by a dozen different carriers. New, 
advanced technologies have been deployed in me long distance networks with great- 
er speed and urgency. 

At the same time, foreign product and service markets are not generally open or 
competitive and stand in sharp contrast to the U.S., which leads the globfu commu- 
nity in allowing foreign-based manufacturers and carriers the opportunity to com- 
pete. Other countries have been painstakingly slow in allowing U.S.-based carriers 
and suppliers comparable access to their markets. This raises important issues of 
global symmetry. While such international issues are beyond the scope of S. 1086, 



141 

they will affect the ability of Congress and the Administration to unleash competi- 
tive forces for the benefit of U.S. consumers and the economy overall. 

Within the U.S., AT&T believes that federal and state policymakers must now 
turn to the one segment of the telecommunications industry that has resisted com- 
petition: the local telephone exchange. Virtually every customer of local telephone 
service in the United States today must answer "No" to these qfuestions: 

Do you have a choice of carriers for your local telephone service? 

K you want to switch carriers to obtain better local service or batter prices, can 

you? 

Compare this experience to the choices avaUable to long distance customers. In 
1992, almost 16 million residential customers switched long distance carriers, at an 
average rate of 44,000 a day. Nine or more long distance carriers offer service in 
45 states, 81 long distance carriers of far service in four states, and in every state 
every customer — rural as well as metropolitan — has a choice of multiple carriers. 

If one looks back ten or twenty years, it is clear that the spur of competition has 
made AT&T a stronger company: more efficient, more innovative, quicker to meirket 
and more responsive to customers. A competitive marketplace is responsible for the 
fact that all long distance carriers and equipment manufacturers have invested 
heavily and successfully in a wealth of new technologies and services. Indeed, a ro- 
bust system of interstate "information superhighways" has already been put in place 
by competing long distance firms. Competitive market pressures assure that these 
positive trends will continue. 

Not surprisingly, in contrast, it is in the monopoly local exchanges where the in- 
frastructure needs are greatest. There is no doubt that the LECs have already in- 
vested a considerable amount in upgrading their networks. And they will continue 
to have a key role in developing the local networking infrastructure. But until local 
telephone exchanges experience real competition, telephone companies will not have 
the marketplace incentives they need to invest more wisely, to become quicker and 
more innovative, and to be more responsive to the needs oi their customers — includ- 
ing their long distance access customers like AT&T. 

If over time, the collective efforts of policy makers and the industry are successful, 
and if true local exchange competition can be established, the benefits are poten- 
tially enormous. Foremost, it would assure — as it has in other telecommunications 
mareets — the most effective and efficient deployment of new products, services and 
technologies that offer users wider choice at lower cost. It would lead to accelerated 
infrastructure development the growth of existing firms and the entry of new finns, 
producing significant new employment. All Americans would benefit as the capabil- 
ity of the nation's communications networics expands and the cost of using it drops. 

Until recently, only the early stirrings of local competition could be felt in the in- 
dustry's far reaches — where entrepreneuriaJ firms such as MFS and Teleport have 
labored. But now there seems to be a serious collective interest on the part of policy- 
makers at the federal and state levels and on the part of the industry to find out 
if, given the right set of regulatory safeguards and incentives, local competition has 
the potentijd to develop. We support these efforts. 

The FCC has taken some small, but important first steps— by adopting rules or- 
dering expanded interconnection opportunities in one segment of monopoly access: 
"transport" — the link connecting long distance carriers' networks to local telephone 
switches. These decisions, however, aid not authorize competition in basic local serv- 
ice, the local loop or local switching. Some states, like Illinois, California and New 
York, have also begun to move in this direction on their own. These are important 
threshold steps, but much more is required to authorize fuU local service competi- 
tion and tie tnese threads together into a coherent national policy. 

That is where S. 1086 fits in. Your bill addresses some of the essential elements 
we believe are necessary before new carriers will be able and inclined to enter the 
local exchange market — such as eliminating exclusive franchises and exclusive local 
telephone company control of rights-of-way. S. 1086 is also on the right path in re- 
quiring interconnection and an unbundled set of service elements (such as local 
transport, local loop, switching and other service elements). The bill appropriately 
opens up resale and sharing of the local carrier's service offerings. 

But the bill falls short by not fully addressing two important additional elements, 
which should be added to S. 1086's list of regulatory objectives: 

Measuring Effective Competition. It is essential that, in creating regulatory and 
economic conditions that permit competitive entry, policymakers not assume that ef- 
fective competition inevitably will occur. Many observers believe that basic local 
telephone service may be a natural monopoly — that the economics of the local ex- 
change will preclude multiple firms from entering and investing to provide cus- 
tomers of local service with a genuine choice of providers. 



142 

We therefore must have agreed upon standards or metrics at the federal level that 
define effective competition — objective measurements that once met, clearly signal 
that the local market is competitive. If the objective test has not been satisfied with- 
in a reasonable time, it may be an indication that regulators need to try another 
path. It could also mean that further technological developments must occur before 
effective competition is possible. Most importantly, it would mean that the local ex- 
change still is not benefiting from the operation of the competitive forces that are 
best able to stimulate new technologies and services. Only if we have a way to know 
whether local competition is developing — and, if so, how fast and how extensively — 
wiU we know if we are on the right course. 

A method of measuring effective competition would also lay to rest the 
misperception being advanced by some in the industry: that the local exchanges al- 
ready face substantial competition. In this regard, the "metrics" or statistics on local 
competition are staric: the LECs today exercise near total control over the local ex- 
change and local exchange access services. The current facts are basically un- 
changed since the time of the MFJ: virtually aU calls — local, short have long dis- 
tance, cellular and interLATA long distance — traverse the local exchange carrier's 
network. The 1987 Triennial Review found that the RBOCs and other local ex- 
change carriers served 99.9999 percent of customers and carried 99.9 percent of 
interexchange access traffic in their regions. These facts are almost unchanged 
today. 

In 1992, for example, 99.86 percent of AT&T's access payments went to the local 
exchange carriers, with only 0.14 percent paid to the competitive access providers 
or "CAPs". Another measure of the local telephone company's impact on the long 
distance market is the level of these access pavments: $14.2 bUlion for AT&T alone 
in 1992, or about 40 cents of every $1 of AT&Ts long distance revenues. See Attach- 
ments A and B. If rules are changed at the FCC and in the states, the CAPs may 
well grow. But, today the local telephone monopoly remains extraordinarily power- 
ful. 

Cost-based pricing of basic network functions. There are stiU significant subsidies 
built into the local pricing structure, much of which is paid by the long distance car- 
riers. The overall subsidy figure may not be nearly as high as is claimed, but it is 
significant enough that regulators need to begin working, now, to rethink how to 
promote the goal of universal service and protect rural and low income customers. 
A competitive marketplace should be no bar to the continuation of appropriate sub- 
sidies designed to promote universal service, provided they are imposed in an even- 
handed way, are based on financial need, and are administered effectively. In this 
regard, we believe that any subsidies should generally be provided directly to the 
end user, who will then be in a position to decide which competitive carrier should 
have his or her business. 

Regulatory efforts to address the subsidy issue can and should proceed simulta- 
neously with other efforts to op>en the local exchange to competition. All these efforts 
will take some time, and they should move ahead. Moreover, the LEG does not have 
to choose between maintaining the current subsidy system and losing profits. Rath- 
er, as regulators address this issue, the LECs have every incentive, in responding 
competitors, to drive the excess, unnecessary costs from their business. AT&T 
learned this lesson in spades from its competitors in the long distance business. In- 
deed, in the long distance market, government did not attempt to remove the his- 
toric subsidies built into long distance rates untU a dozen years after competition 
was introduced. Even now, the goal of cost based pricing is elusive, and long dis- 
tance carriers and their customers continue to beeir the burden of substantial struc- 
tural subsidies. 

Let me put to rest directly any suggestion that AT&T's planned merger with 
McCaw will impact or otherwise diminish this local monopoly. The AT&T/McCaw 
merger involves a significant amount of stock, and it is certainly an important part 
of AT&Ts effort to advance the day that wireless networks wiU connect customers, 
anytime and anywhere. But the more critical fact for purposes of this hearing — ap- 
plicable to all cellular services today — is that some 99 percent of all cellular calls 
rely on the LECs' facilities. This makes the local exchange networks "bottleneck" 
monopolies for McCaw and other cellular carriers, just as they are for long distance 
carriers. AT&T and McCaw do not own any monopoly local exchange faculties now 
and will not as a result of the merger. 

Add in the enormous disparity in price (with cellular service costing 400-500 per- 
cent more than local service); the relatively low calling volumes (under 1 percent 
of local calls are initiated over cellular phones); the pending questions about avail- 
able spectrum and service (juality — and it is doubtful whether cellular will be con- 
sidered a true alternative to local landline telephone service any time soon. Surely 



143 

it is not in the foreseeable future — as the RBOCs themselves have advised the Jus- 
tice Department, stating: 

"It has been suggested, however, that mobile services are converging with 
landline services * * ♦ Given the vast discrepancy in both price and present lev- 
els of penetrations, direct competition [with landline services] is nowhere near 
imminent."^ 

There has been media speculation, nevertheless, that the AT&T/McCaw merger 
might put AT&T in a position to bypass the LEG facilities in the future and link 
directly to its long distance netwoi4c. The economics simply do not justify this today. 
As illustrated by Attachment C, ninety nine percent (99 percent) oi the cellular long 
distance calls that AT&T carries use LEG facilities to connect the cellular customers 
to AT&T's long distance network. Moreover, even if direct links to cellular systems 
were someday established, this would not diminish the local exchange monopwly. It 
would only create an alternative connection for the relatively few long distance calls 
that originate or terminate on cellular networks, as compared with the vast number 
of calls from corded or cordless phones over the local telephone network.^ Nor would 
it impact the long distance market itself. In terms of long distance calling, calls 
originated on cellular phones account for only one tenth of one percent (0.1 percent) 
of aU long distance calling — ^hardly a dent in the LECs' pervasive monopoly power 
over the mcUities long distance carriers require to access tneir customers. 

An appropriate set of metrics will make it clear when these facts have changed — 
as they plamly have not so far — and when, finally, it might credibly be concluded 
that the local exchanges have begun to experience competition. If the local exchange 
evolves into a genuinely competitive marketplace, moreover, there will be a further 
benefit: regulation can be reduced as the loced market becomes competitive and the 
MFJ line of business injunctions could be lifted when that competition becomes ef- 
fective. The contentious and distracting debates that arise in this forum and in the 
court and FCC over its continuance would end. If customers have a real choice of 
local service providers, there would be no longer any need to exclude the BOCs from 
the long distance and manufacturing markets. But just as experience with monopoly 
required the imposition of MFJ as a pro-competitive safeguard, only the experience 
of real competition can justify their removal. 

The RBOCs' reactions to the broad issue of whether the local exchanges should 
be open to competition have been interesting — and not at all uniform. Oi the seven 
RBOCs, only Ameritech has submitted a proposal to the FCC that it claims will 
have the effect of opening its local networks to competition. They are to be com- 
mended for that proposal. But, even that proposal is flawed, particularly by propos- 
ing MFJ and other changes prior to the existence of effective competition. Local ex- 
change competition should be the first priority to build the telecommunications in- 
frastructure and keep the communications capabilities of this country on the cutting 
edge. 

Instead of working toward competitive local markets, many of the RBOCs have 
opposed competition and waged a campaign for long distance authority or other con- 
cessions. Five RBOCs have asked the FCC to declare outright that it is in the "pub- 
lic interest" for them to enter the long distance business, despite the continued mo- 
nopoly over local exchange services. 

Ameritech conditioned its "willingness" to become subject to rules for local ex- 
change competition on the simultaneous grant of long distance authority by the 
court. This indeed highUrfits the degree of RBOC control over the local exchange, 
for only a monopoly has the luxuiy of "permitting" competition. It also underscores 
the fact that regulatory changes in rules should not be confused with the existence 
of real competition. 

The RBOCs' only justiflcation for their MFJ proposal is their claim that the long 
distance market is not truly competitive and that, somehow, only entry by the 
RBOCs can make it so. This is patently false, and they know it. AT&T has re- 
sponded to the RBOCs' inaccurate and misleading claims before this Subcommittee 
in the July 14th hearing by letter to the Subcommittee dated August 2, 1993, sub- 
mitted for the hearing record. A copy of that letter is attached to this testimony, 
as Attachment D. . 



1 Report of the Bell Companies on Competition in Wireless Telecommunications (p. 185), dated 
October 31, 1991 and filed with the Department of Justice December 13, 1991 in support of the 
RBOCs' wireless waiver request. 

2 Customers placed an average 5.2 billion daily minutes of local calls from conventional phones 
(wired and cordless) in 1991, compared with only 26 million minutes from cellular phones. In 
terms of percentages, local calling initiated from a cellular set was only V4 of 1 percent of all 
local calling. Moreover, cellular originates only Vio of 1 percent of all long distance calls. 



144 

In fact, the long distance marketplace is robustly competitive. When the MFJ was 
announced in 1982, AT&T was the only truly national long distance network; and 
while it was the envy of the world, its network principally used the old analog tech- 
nology. The networks of NCI and the other competing carriers were collectively V20 
the size of the AT&T network. These other carriers, moreover, lacked the advantage 
of AT&T's integration with and access to the essential local exchange networks of 
the RBOCs. 

After the break-up, AT&T's competitors took the Decree to the bank and the bond 
maiket — literally — and raised the money to expand the capacity of their networks 
on the strength of the Decree's promise that the RBOCs could no longer abuse their 
monopoly power and favor their long distance afliliate — ^because while they stiU had 
the power, they had no affiliate. As a result, FOUR major digital fiber networks 
have been built (AT&Ts, MCI's, Sprint's and Wiltel's). EIGHT other large, regional 
fiber networks have been constructed. Today our competitors' networks have tne ca- 

Sacity to readily absorb the nation's long distance demand — even without AT&T. In- 
eed, almost 500 long distance carriers are using this enhanced, competitive long 
distance infrastructure to introduce new services at breakneck speeds. 

AT&T has itself responded, investing over $20 billion on upgrading its own net- 
work — to the point that the AT&T network today is essentially a new, fully digital 
network. We were not directed to do this by government regulators, nor did we seek 
government funding. We made this investment, and wrote off billioas of dollars of 
analog fadlities, for one simple reason: to remain competitive by meeting our cus- 
tomers' expectations. 

During this same period since divestiture, tariffed consumer long distance rates 
of the three major carriers have dropped about 55 percent in real terms when infla- 
tion is factored in. TTiis has been due in part to FCC required changes in access 
pricing, but it also reflects other price cutting by long distance carriers, and the in- 
creased usage of new lower priced services that competition has stimulated. The 
record in long distance demonstrates a clear downward trend. 

In this regard, the access charge reductions are themselves a reflection of competi- 
tion in the long distance market. Lower long distance prices have stimulated in- 
creased usage which, by lowering the unit cost of access to the local network. How- 
ever, this has led to still lower access charges. These lower charges in turn have 
led to lower long distance prices, stimulating further calling, and so forth. The de- 
clines have not continued in 1993 because tne local telephone company access in- 
creases exceeded access decreases for the first seven months of the year.3 However, 
this beneficial cycle can resume if competition is able to develop for the access serv- 
ices the local carriers provide. 

The bottom line on the RBOC claim that the long distance market is not competi- 
tive, however, is simply a matter of common sense. One need look no further than 
the declining prices, the vast array of real choices customers have in selecting long 
distsmce providers and services, and the extent to which they exercise these choices, 
to know that the market is vigorously competitive. These facts both contrast sharply 
with the current state of the local exchange, and attest eloquently to the infirmity 
ofthe RBOCs' claims. 

The lower prices and the impressive degree of infrastructure growth of the com- 
petitive parts of the telecommunications sector in the past decade dramatically at- 
test to the success of this nation's pro-competitive telecormnunications policy. Kven 
more importantly, the vitality of our nation s telecommunications industiy is driving 
underlying rates of U.S. productivity and growth, increasing jobs and tne strength 
of our domestic economy, and contributing to our nation's competitiveness world- 
wide. 

At the outset, I referred to the need for government to recognize when its competi- 
tive policies have been successful, and the marketplace can take over. The FCC's 
continued pervasive economic regulation of AT&T is one good example of a failure 
to do this. The need to remove these burdensome, counter-productive rules was most 
recently underscored by British Telecom's announced investment of nearly $5 biUion 
in MCI and its acquisition of veto-power over MCFs major business activities. Surely 
there is no longer any legitimate justification for appljang regulations to AT&T that 
have been deemed unnecessary for our competitors. AT&T wUl soon ask the FCC 
to re-examine these thirteen year old classifications in light of current industry com- 
petitiveness. 

This same theme — the need for government to know when competition is working 
on its own — guides my next comments on the legislation. AT&T opposes the provi- 
sions of S. 1086 that would require regulators to apply the same interconnection 
rules to the long distance industry that it adopts for the monopoly local telephone 



3 See Attachment D, letter dated August 2, 1993 from T.H. Norris of AT&T to Sen. Inouye. 



145 

industry. There is no justification for this. The long distance market is already com- 
petitive; the local market is not. These rules could require competitors to share pro- 
prietary network technology. Moreover, there are no structural or other bEuriers to 
entry into the long distance marketplace. Any firm has the option of building its 
own network — aa many carriers already have — or of reselling services over any of 
the competing long distance carrier's facilities — hundreds of companies do. This is 
not true of the locsd exchange, where the LECs will continue to control the local loop 
for some time. 

AT&T also objects to the CPNI rules in the bill — which have both priv£icy and 
competitive implications. We have several problems, not the least of which is that 
there are no reasons to apply these rules to competitive long distance carriers, even 
if there are reasons to apply them to the local exchange. We urge that they be sev- 
ered from S. 1086 and dealt with separately. Even if the rules were revised to apply 
only to LECs, they would still create serious problems for AT&T and other long dis- 
tance and cellular carriers with respect to security of our network and the provision- 
ing and billing of services. It would also endanger proprietary marketing informa- 
tion, by requiring its disclosure to our direct competitors. 

The Subcommittee has taken on a significant policy challenge. We at AT&T are 
ready to help any way we can, working with you to establish the rules that will 
guide the telecommunications industry — and the nation — to a more competitive, 
more productive, and more prosperous 21st century. Thank you for inviting me to 
testify. I would be pleased to answer any questions you may have now or for the 
record. 



ATTACHMENT A— AT&T LONG DISTANCE REVENUES — PAID TO LECS FOR EXCHANGE 

ACCESS, 1992 




AT«&T Long Distance Revenue: $35.5 Billion 
LEC Access: $14.2 Billion 
CAP Access: $ 0.019 Billion 



146 

ATTACHMENT B— 1992 AT&T LOCAL ACCESS PAYMENTS— TOTAL: $14.2 BILLION 



Local Exchange Carrier 
99.86% 
$14.2 Billion 




CAPS 

0.14% 
19 million 



Approximately .40 of every long distance dollar is paid to local telephone companies 
or competitive access providers for local access. In 1992, AT&T's local access ex- 
pense totalled $14.2 bilhon, with 99.86 percent to telcos and .14 percent paid to 
CAPs. 

ATTACHMENT C— 99 PERCENT OF ALL CELLULAR CALLS USE THE LOCAL TELEPHONE 

NETWORK 



LONG DISTANCE 
NETWORKS 



CELLULAR 
NEVNORK 
SWITCH 




attachment d — letter from tom norris, vice president, federal government 

affairs, at&t 

August 2, 1993. 

The Honorable DANIEL K. INOUYE, 
U.S. Senate, 
Washington, DC 20510 

Dear Mr. Chairman: Durine recent hearings before your Subcommittee on S. 
1086, the Telecommunications Infrastructure Act of 1993, James G. Cullen, Presi- 
dent of Bell Atlantic, made several highly inaccurate and misleading statements 
about AT&T's pricing. This attempt to shift the Subcommittee's attention away from 



147 

local exchange competition and the monopoly that his company and the other Re- 
gional Bell Operating Companies (RBOCs) enjoy in local telecommunications must 
be corrected. 

Mr. CuUen confused the issues raised in S. 1086 by selecting an issue that is inor- 
dinately complex, even to those in the industry. Specifically, he testified that the 
local exchange carriers (LECs) reduced access charges to long distance carriers, or 
DCCs, by approximately $250 million and that AT&T did not reduce its long distance 
prices by a comparable amount. In fact, over the recent period reflected in AT&T's 

{)rice changes, LECs increased their switched access chaises to DCCs by $20 mil- 
ion. i Mr. CuUen's statement is therefore not only a gross overstatement, it is also 
conipletelv contrary to the actual direction of LEC access pricing. 

Mr. CuUen's first mistake was to use a single access reduction to disguise multiple 
recent IXC access charge increases and then blaming long distance carriers for fail- 
ing to pass through remictions we never received. He further misled Members of the 
Subcommittee by blaming AT&T for failing to pass through 100 percent of the fic- 
tional DCC access reduction. In fact, of course, AT&T pays only about 60 percent of 
DCC access charges and could hardly be expected to account for the entire reduction 
even if there had been one. The basic fact remains that the access charges in recent 
LEG filings have increased, not decreased, AT&T's access expeuse. 

Mr. Cullen's testimony also included a chart fiiiim the February 1993 issue of 
Business Communications Review (BCR) which he claimed showed the DCC industiy 
is engaged in oligopolistic pricing. He selectively used a chart but failed to include 
the entire article, which would have disproved the precise point he sought to make. 

Had he done so, the Members of the Subcommittee would have seen that "basic 
long distance charges" as defined by the author, are the undiscounted per minute 
rates for AT&T Megacom, MCI Prism 1 or Sprint Ultra WATS for a "typical" cus- 
tomer with 1,000 hours of daytime traffic per month and include the cost of Tl ac- 
cess 24 voice grade lines) at one end. 

The very point of the BCR article was to inform business telecommunications 
managers that there is substantial competition for such services and that they can 
and should negotiate discounts off these "basic" rates. The author wrote, "Tarified 
or not, today^s basic long distance service prices are just a starting point (my empha- 
sis) in determining what your particular company might pay." This point is con- 
stantly reiterated throughout the article with further statements such as "base rates 
are just the 'sticker price'; pricing plans and special deals make the diiference." 

Nor are customers for the services whose base rates were charted representative 
of customers in general. But, in any case, every residential and business customer 
has a plethora of discount plans available, from AT&T's i plan to Sprint's The Most 
to MCI's Friends and Family to Tariff 12 and its clones. Customers have unique re- 
quirements, and Mr. Cullen s implication that long distance pricing can be described 
accurately in one chart shows either a deliberate attempt to confuse or a gross mis- 
understanding of how long distance competition works. 

K Members of the Subcommittee and other policy makers are distracted by spe- 
cious arguments such as Mr. Cullen's, they will fail to focus on the real problem 
and public policy need — ^the absence of competition in the local infonnation infra- 
structure. It is noteworthy that nowhere in his testimony or rebuttal did Mr. CuUen 
refdte the fact that the entire DCC industiy is totally dependent on the LECs for 
access to our customers. Well over 99 per cent of AT&T's access expense in 1992 
went to the LECs; only $19 million out of $14 billion, or 0.14 percent, went to their 
competitors while 99.86 percent stayed with the LECs. 

The debate in Congress is, properly, how to ensure that competition flourishes in 
all segments of the telecommunications and information industry. Competitive con- 
ditions already exist in the interexchange industry and need to be established, if 
possible, in non-competitive segments — notably that of local exchange telephone 
companies. 

AT&T looks forward to contributing to the fact-finding and deliberations of the 
Subcommittee and full Committee. You may rely on us to furnish facts as clearly 
as we know how. 
Sincerely, 

Tom Norris. 



Attachment A — Below are LEC access expense changes that have an impact on 
the entire LEC access customer base. AT&T's Price Cap Regulated Basket 1 and 2 



lA $250 million reduction in switched access charges to the IXC industiy was nnade as part 
of the LECS' annual tariff filing effective July 1, 1993. But the $250 million number reduction 
in carrier switched access was more than offset by $270 million increases in access expenses. 



148 



Services are a subset of this total. LBC access charge changes affecting AT&Ts 
Price Cap Regulated services are referred to as "Delta Y", and serve as input to 
AT&T's Price Cap Indices (PCT). AT&T's PCI is typically updated twice per year 
to include accumulated LEC access changes, inflation (6NP-PI), and FCC sanctioned 
exogenous cost adjustments. Delta Y is computed using 1992 Base Period Price C^ 
volumes and is relegated to AT&T's Price Casp Baskets using an "As AllocateJ" 
methodology consistent with FCC Docket 87-313 rules. 



Switched sccKS charge dianies 



LEC information data base 

GTE CCL increase (Trans. No. 778) 

LEC 800 number portability 

LEC annual access filing 

General support costs reallocation and uni- 
versal service fund adjustments. 

Sum of access charge changes 



Effective date 



Fully deployed mid-1992 

April 2, 1993 

May 1, 1993 

July 1, 1993 

July 1. 1993 



Estimated IXC industry imped in 
millions of dollars 



$100 
$33 
$74 

($250) 
$63 



$20 



LECs reduced total access expenses by $184 million in their annual filing. The 
net reductions to industry switcned access services were $250 million, apportioned 
to switched access categories as follows: carrier common line charges reduced by 
$229.1 million, switched traffic sensitive charges reduced by $21.1 million. (Note: 
LBC Information Database charge changes were absent from AT&T's prices during 
1992) Including the additional access charge changes, industry switched access ex- 
penses increased by $20M. AT&T has included approximately $9M worth of LBC 
switched access charge changes in its recent PCI filing. 

Senator INOUYE. Thank you very much, Mr. Allen. May I now 
call on Mr. Weiss? 

STATEMENT OF WILLIAM WEISS, CHAIRMAN, AMERTTECH 

CORP. 

Mr. Weiss. Thank you, Mr. Chairman. I am also pleased to be 
here to present the views of the seven regional companies on Sen- 
ate bill 1086. 

We commend the sponsors for their vision that greater infra- 
structure development is needed to bring advanced telecommuni- 
cations services to broad segments of our society and to give con- 
sumers more choice. 

We support the legislation's reliance on competition and private 
investment to do this. As much as we applaud these goals, we do 
not believe that the proposed bill in its current form will achieve 
those goals. 

This industry is rapidly realigning. This year's proliferation of 
new coalitions and the court decision striking down the video pro- 
gramming ban confirm this. What is needed is a comprehensive re- 
vision of telecommunications policy to govern this dramatically 
changing industry. 

We believe the solution is based on opening all parts of the tele- 
communications marketplace to even-handed competition. 

Let me state that there is competition in the local exchange. To 
say otherwise is to perpetuate a myth. The local exchange business 
comprises many elements: business telephone systems, residential 
and business exchanges, cellular telephone systems, and inter- 
connecting circuits and networks. 

Now, some parties attempt to define the state of local exchange 
competition by who provides dial tone. This simply shifts the atten- 
tion from the real situation that exists today. 



149 

Let me give some examples of how competition really works. 
Large businesses generate a tremendous volume of local traffic, 
mostly within their own leased or purchased systems, local ex- 
change business systems. 

And I must tell vou that AT&T and other competitors dominate 
this portion of the local market. In providing the dedicated connect- 
ing links between the local exchange switching machines and the 
long-distance network, other companies already provide more than 
3 out of every 10 circuits that are established. 

Fifty percent of local business toll services are handled by the 
long-distance carriers. Seventy-five percent of local 800 toll free 
calling is carried by long-distance carriers. 

Consumer choice is what this all about. In many elements of the 
local exchange wide consumer choice exists today. It is time to 
make choice available to consumers in all markets of this industry. 

With AT&T's $12.6 billion acquisition of McCaw it will instantlv 
become the largest cellular provider in the United States and will 
move further into the local exchange. 

The acquisition enables the compan^s largest carrier to become 
the end-to-end service provider, not just to large businesses, but 
also to high-volume sophisticated local customers. 

There is also the matter being discussed currently of AT&T cable 
alliances. This vision, as articulated by AT&T, is communications 
any where, any time, any place. 

Clearly, the long-distance, cable, and local exchange markets are 
converging quickly, but they are still in limited hands. 

Consumers want more choice in end-to-end providers. The pro- 
posed legislation must be modified if all consumers are to receive 
even-handed treatment and over time their service in all serving 
areas is not to be impaired. 

This legislation provides no significant relief from a long-distance 
ban. Today, the restriction discourages us from bringing advanced 
services such as Ameritech's Wisconsin Health Information Net- 
work to less populated areas. 

The long-distance carriers claim we will dominate them or the 
market if this ban is lifted. When we would start with zero percent 
of this market can anyone seriously believe that argument? 

The sum of it is this: We too are investor-owned and we are com- 
peting with all other businesses for investment capital. We are not 
asking for handouts or for protected markets, but we do believe 
that we should be given the opportunity to compete for the re- 
sources or funds necessary to better serve our customers through 
an upgraded local exchange infi'astructure. 

Universally today analysts and commentators are calling for the 
restrictions to be overturned, to be eliminated. As Judge Ellis wrote 
in his decision striking down the video programming ban "there is 
no more draconian approach to solving the problems of potential 
anticompetitive practices by telephone companies than a complete 
bar on their entry into that industry." 

That finding applies with equal force to the long-distance and 
manufacturing restrictions of the MFJ. We urge the subcommittee 
to modify S. 1086 to provide consumers the benefits of increased 
competition in all aspects of the telecommunications market. 

Mr. Chairman, thank you. 



150 

[The prepared statement of Mr. Weiss follows:] 

Prepared Statement of William L. Weiss 

My name is William L. Weiss and I am the Chairman and Chief Executive Officer 
of Ameritech Corporation. I am here today to present the views of Lhe seven regional 
telephone companies regarding S. 1086. • . v v 

The regional companies commend the sponsors of S. 1086 for recognizing that the 
rapidly changing technology of telecommunications has outpaced the abiUty of the 
current regulatory framework to guarantee that the wide variety of services arriving 
in the marketplace will be available to all consumers. We agree that the world of 
telecommunications in the future should be focused on customers — customer choice, 
customer needs, and customer access to new products and services. 

Developments in the marketplace, including the recently-announced acquisition by 
AT&T ofMcCaw, are leading to a society in which certain customers will have bet- 
ter access to new technologies than others. The Subcommittee recognises this prob- 
lem and is right to address it because, as S. 1086 states, "greater infrastructure de- 
velopment is needed to bring advanced telecommunications services to small busi- 
ness, disadvantaged, residential, low-income, educational, medical, and rural users." 

My testimony today, on behalf of the seven regional Bell companies, is to reassure 
you that we have been, and will continue to be, concerned about customer access 
to quality service. But the solution currently proposed bv S. 1086 will damage the 
long-term goal of quality, affordable service by placing the Bell companies at a se- 
vere competitive disadvantage. 

We beUeve that the local exchange companies are well-positioned to build an in- 
frastructure that provides these services, particularly to those consumers identified 
by the legislation as most in need. Unlike other oroviders in the marketplace, we 
have a tradition of providing universal service. However, if we are to continue to 
meet the challenge of improving services for those populations the legislation seeks 
to help, we must oe able to fuUy serve the entire information marketplace. 

The vision of the legislation is futuristic, but its solution — which relies on market 
distinctions that no longer exist — is a relic of the past. By imposing considerable 
new competitive risks on the regional companies without giving us the opportunity 
to compete, S. 1086 will have an effect precisely opposite that intended by the spon- 
sors. It will retard investment in the information infrastructure and, as a con- 
sequence, virtually guarantee that the gap between the information haves and have- 
nots will continue to grow. The very citizens that this bill seeks to help may instead 
be relegated to the backwater of the Information Age. 

The regional companies believe that the only way to achieve the Committee's ob- 
jectives is throu^ full and fair competition in all segments of the teleconcununi- 
cations marketplace, including long distance, manufacturing and cable television. As 
Senator Breaux said at the July 14 hearing: "Let everybody compete. If you can do 
it, do it. That is what America is about." 

A recent study demonstrates dramatically the benefits that will be achieved if this 
Committee introduces equitable competition in the telecommunications industry. In 
a July 1992 study, A. D. Little had identified over $36 billion in annual cost reduc- 
tions that could be achieved in the health care arena from the implementation of 
just four telecommunications applications. Long distance applications represent a 
significant part of the $36 bUlion savings. 

As part of the process of implementing the MFJ, the U.S. was divided into 197 
Local Access and Transport Areas, or LATAs. The Bell companies were prohibited 
from providing telecommunications services between LATAs and are therefore lim- 
ited in their ability to achieve these large health care savings. 

The cost reductions identified by A. D. Little are significant. Achieving them 
would dearly help control the spiraling costs of health care in this country. By per- 
mitting the Bell companies to compete for the long distance telecommunications 
business, you would permit them, working with health care providers, to assemble 
services needed to achieve these, and possibly greater, cost reductions in the health 
care that is so vital to us as a nation. 

Also, the prestigious WEFA Group released an analysis entitled "The Economic 
Impact of Eliminating the Line of Business Restrictions on the Bell Companies." 
The study forecast the economic impact of entirely and permanently eliminating the 
MFJ restrictions from the Bell Companies and the video programming restriction 
in the Cable Act from all local telephone companies. It also assumed that all tele- 
communications providers would compete under equivalent terms and conditions. 

WEFA projected that this relief would generate an additional 3.6 million jobs over 
the next ten years — jobs that are spread out across all states and all major industry 
groups. It also projected $247 billion in added real GDF by 2003 and $630 billion 



151 

in gains to consumers over those ten vears, freeing up a comparable amount of dis- 
posable income for purdiases of other products and services. The study dem- 
onstrates that full and fair competition in the telecommunications maricet will cre- 
ate jobs and benefit consumers. 

Based on widely respected economic models, the WEFA analysis found that com- 
petition resulting from line-of-business relief would bring these results: 

• Long distance toll rates would fall 50 percent from baseline, saving customers 
over $490 billion over the next decade. 

• Cellular rates would fall 15 percent from baseline over the first five years fol- 
lowing relief, saving more than $25 billion by 2003. 

• Cable prices would decrease almost 25 percent from WEFA's baseline forecast 
for the ten-year period, saving consumers neariy $75 billion by 2003. 

For these reasons, S. 1086 should be recast to conform to the basic construct envi- 
sioned by the study. 

Telecommunications providers, other than the Bell companies, already are free to 
compete outside their traditional businesses. Long distance carriers are offering 
local services in competition with the regional companies and other local exchange 
companies, and they nave been quite successful. In the five states that we serve at 
Ameritech, long distance carriers now provide 50 percent of the local toll service pro- 
vided to larger business customers. These carriers have also successfully targeted 
800 toll-free services. In four years, we have lost 75 percent of our local 800 Busi- 
ness, not because we are poor business people, but because the carriers could pack- 
age local and long distance 800 services and we cannot. The MFJ long distance re- 
striction permits the regional companies to provide only local 800 toll-free service, 
only a piece of what customers want. 

Several national cable oj>erators, most notably Time Warner, have stated their in- 
tention to offer local telephone service over tneir cable facilities. And AT&T has 
been holding talks with the nation's largest cable companies about linking cus- 
tomers into one big network, which would include allowing customers to phone one 
another through their cable lines. 

The regionaJ companies ask only for the opportunity to compete on an equal foot- 
ing in the long distance, cable, and other marisets from which we are currently 
berred. We are not asking for special privileges or wholesale deregulation in these 
businesses; we only want the chance to compete fully. 

There are subtle but important regulatory practices that must be changed for 
there to be full and fair competition. Depreciation and capital recovery practices 
among cable companies, telephone companies and long distance companies vary 
widely today. This is difficult to justify where the companies use the same type of 
equipment to offer the same services. For example, the companies all use fiber optic 
transmission facilities, but each depreciates the fiber over different time frames. 

As between carriers there is disparity. The FCC permits the long distance carriers 
to depreciate their plant over shorter periods than it permits the local companies 
to use. Such disparities among comf>etitors simply is not proper in a fuUy competi- 
tive market. Thus, S. 1086 should require parity on all such items among tele- 
communications competitors. 

The existing networks operated by the regional companies, with their tradition of 
universal service, are the most likely supplier of advanced services to the mass mar- 
ket. We want to upgrade our networks to provide voice, data and video service to 
all customers. But as competition intensifies, we need the opportunity to compete 
for new services that will provide the sources of funds for the necessary infrastruc- 
ture upgrades. 

Universal service has been achieved through a conscious and intricate system of 
subsidies. This has been critical in the past to bring services to economically dis- 
advantaged customers end to millions of^ rural customers. The problem is that the 
existing system was created when AT&T had monopoly control of local and long dis- 
tance services. That is no longer the case and, as competition spreads to all sectors 
of the telecommunications maricetplace, sustaining subsidies from competitive serv- 
ices will be increasingly very problematic. 

The issue of continued subsidies is significant. A recent study by the U.S. Tele- 
phone Association estimated that local telephone service is subsidized in the amount 
of $20 billion annually. It identified the sources of these subsidies as large and so- 
phisticated business customers and toU rates. It is the large customer and the long 
distance carriers who have the competitive choice today to leave the public networic. 
And they are making those choices. 

S. 1086 must also deal with the remaining subsidy issues in ways that are specific 
and that spread the burden evenly over the entire telecommunications industry. 
Part of the answer is to free the Bell companies to enter any markets they seek 
to enter. This will allow them to maximize their efficiencies and to lower the costs 



152 

of providing some currently subsidized services. Moreover, it will stimulate the mar- 
ket as shown by the WEFA study and lower consumers' overall telecommunications 
expenditures, as compared to retaining the restrictions. 

Universal service is clearly in the national interest and is largely accomplished. 
It must be maintained so the promises of the Information Age can reach all Ameri- 
cans wherever they may choose to live and work. But, ultimately we must recognize 
that the burden currently borne by the local telephone companies cannot be sus- 
tained "as is" in an increasingly competitive local exchange business. 

This legislation, by increasing competition in the local exchange, would only accel- 
erate that trend just as occurred with 800 services. While some have argued that 
this threat to universal service should forestall further opening of the local business, 
we think the better view is simply to allow us the freedom to compete for new 
sources of revenue to replace those lost to local competition. As described more fiiUy 
below, removing the entry barriers from long distance, manufacturing, and cable tel- 
evision will have benefits for consumers. If there are any lingering doubts about 
whether the regional companies could upset the terms oi competition in the busi- 
nesses from which we currently are excluded, these concerns are best dealt with 
through focused regulation and safeguards, not entry restriction. 

Long distance relief. Our entry into long distance would bring immediate benefits 
to consumers in the form of greater choice and lower prices. No one can deny that 
the long distance business could stand a healthy dose of price competition. Recently, 
AT&T raised its prices by 4 percent, and MCI and Sprint quickly followed suit. 
These increases occurred at a time when local exchange companies had decreased 
access prices. Our entry would invigorate competition in this business. 

In acfdition, elimination of the long distance ban is essential to achieving the Sub- 
committee's vision that advanced services be available to all customers, wherever 
they reside. The current restriction requires the regional companies to build sepa- 
rate facilities in each calling area if we seek to provide advanced services requiring 
data base storage and retrieval. These facilities could include data base applications 
for distance learning, remote health care monitoring and telecommuting. It is only 
economically feasible to build these separate facilities where enou^ people in the 
calling area will use the new service to cover the cost of buying, installing and main- 
taining the equipment. Less populous areas may lose out. If we could share facilities 
between calling areas, for example, by buUding a center in one city to serve an en- 
tire state or region, new services could be brought more quickly and cheaply to ev- 
eryone. 

AT&T and the other long distance carriers object to our entry into long distance 
before it has been demonstrated to their satisfaction that there is effective competi- 
tion in the local exchange. In fact. Sprint has gone further and argued for a ten- 
year moratorium on our even asking for relief. These complaints are nothing more 
than self-serving attempts to prevent competition, not to serve consumers. Because 
mariiet exclusions by definition harm consumers, the long distance restriction was 
designed to go away once there was no substantial possibility that we could use our 
mareet power in the local exchange to impede competition in the long distance busi- 
ness. Significantly, despite what the carriers may claim, the decree does not require 
that there be local competition in order for relief to be given. MFJ relief can be 
granted if there is a set of rules that requires us to compete fairly and not take 
advantage of our ownership of local facilities. 

The regional companies now have percent of the long distance business we seek 
to enter, and would be competing against dozens of companies, including three very 
prominent competitors. No one could seriously believe that we could somehow drive 
AT&T and the other carriers out of this business. Moreover, if the regional compa- 
nies have so much power in the local exchange to dominate other services, how have 
the carriers taken half the business in toU? How could we have lost 75 percent of 
our local 800 business if our power in the local exchange was as great as the car- 
riers claim? The fact is that tne harms the carriers complain of are sheer specula- 
tion. Their dire predictions did not come true with customer premises ecjuipment, 
with cellular, or with information services. It is time to remove the long distance 
restriction and let customers reap the benefits of increased competition in that busi- 
ness. 

Manufacturing relief. In 1991, the Senate overwhelmingly passed Senator Hol- 
lings' bill to provide relief from the manufacturing ban of the MFJ. Manufacturing 
relief is even more important now than it was in 1991. The announced acqpisition 
of McCaw by AT&T raises the specter that AT&T's manufacturing arm will favor 
McCaw over other cellular provioers in supplying it first with new technology and 
features before they are made available to AT&T/McCaw's competitors. 

Information services. The regional companies' ability to offer information services 
has been exhaustively litigated in the district and appellate courts. The regional 



153 

companies have been offering information services on an unrestricted basis since the 
ban was removed in 1991. The speculative fears of domination and monopolization 
made by opponents of relief have not come to pass. The market is working and we 
urge the SuDcommittee not to tamper Mrith it. 

Cable relief. Last month, a federal district court struck down the ban on telephone 
companies' provision of video programming in their service areas as an unconstitu- 
tional infringement on the companies' rights of free speech. The court's action was 
in harmony with the Subconmiittee's intention to remove the restriction in this leg- 
islation. We would welcome an affirmation of the court's decision in any legislation 
in order to avoid the expense and delay of appeals from the court's order. 

Judge Ellis wrote in nis decision striking down the video programming ban that 
"there is no more draconian approach to solving the problem of potential anti-com- 
petitive practices by telephone companies * * * than a complete bar on their entry 
into that industry. Although he was writing about cable television, his holding ap- 
plies with equal force to the long' distance and manufacturing restrictions oi the 
MFJ. It is time for Congress to fina less drastic means to protect against speculative 
harms to competitors that might occur from our entry into currently forbiaden busi- 
nesses, particularly given the very real benefits that are being denied consumers by 
our foreclosure from these businesses. 

In conclusion, the regional companies want to work with the Committee to imple- 
ment the vision of this legislation. But its terms must be modified if it is to be suc- 
cessfiil in realizing that vision. S. 1086 wiU only make it harder for the regional 
companies to bring advanced services to all consumers. 

The solution is not the unbalanced competition set out in the draft. The answer 
is to free the marketplace to best serve all customers by opening up all markets to 
all competitors. The companies with the best products and the most efficient net- 
works will be successful, and in the long run, all consumers will win. That is what 
the regional companies want. We think that is what the Subcommittee wants. We 
stand ready to work with the Subcommittee to achieve that objective. 

Thank you. 

Senator Inouye. Thank you very much, sir. May I now call upon 
Mr. Kapor? 

STATEMENT OF MITCHELL D. KAPOR, CHAIRMAN OF THE 
BOARD, ELECTRONIC FRONTIER FOUNDATION 

Mr. Kapor. Chairman Inouye, Senator Danforth, members of the 
committee, I want to thank you for the opportunity to come before 
you and commend you for taking such a strong interest in tele- 
communications infrastructure modernization. 

I am the chairman of the board of the Electronic Frontier Foun- 
dation. The EFF is a nonprofit public interest group whose mission 
it is to ensure that new electronic highways enhanced free speech 
and privacy rights and are accessible to all segments in society. 

The EFF actively builds coalition and consensus among public in- 
terest organizations, consumer gjroups, computer and communica- 
tions firms, and cutting edge providers of new information services. 

For those of you who do not know me, I am also the principal 
designer of the Lotus 1-2-3 spreadsheet program, and I served as 
the CEO of Lotus Development Corp. from its founding until 1986. 

Properly implemented, the growing information and communica- 
tions infrastructure is the basis for nothing less than a media revo- 
lution as important as the printing press, offering as yet 
unimagined opportunities for building and revitalizing communities 
and helping businesses maintain their competitive edge. 

But we know to achieve these benefits we need more capacity 
than is available in today's telephone system and we need more 
than 500 channels of cable television offering just entertainment, 
news, and sports. 

Today's phone systems does not have the capacity to enable us 
to exchange multimedia information. And 500 channels fail to meet 



154 

our real needs if they only allow one-way distribution of informa- 
tion from the network operator. 

And if that information is purely selected by the operator, the 
interactivity that is critical for educational services, the library ac- 
cess, the onhne medical assistance, for telecommuting or rural 
business connections, and for the next generation of multimedia en- 
tertainment it cannot be accommodated in a one way system or one 
with other limitations on its use. 

So, our vision is one that promotes a rich diversity of information 
sources and new applications, that creates new entrepreneurial op- 
portunities and is resistant to the monopolization of information 
channels. 

We have given a name to the concept that ties together these 
goals. We call it "open platform service." It has four very simple 
points to it. 

First, open platform services must offer widely available 
switched digital connections, point to point, anybody talking to any- 
body else, not just predetermined channels. 

It must be affordably priced. It has to be open to everyone with- 
out discrimination as to the content of the message. And it has to 
have sufficient upstream capacity to let the users themselves origi- 
nate as well as received good quality video multimedial services. 
Open platform services will provide the onramps for the Nation's 
growing information superhighway. 

Congress has the responsibility to see that the national informa- 
tion infrastructure emerges from today's telephone and cable net- 
works. 

The Clinton administration has shown a great deal of interest in 
the Nil, but we know that there is no way tne Federal Grovemment 
can or should build the national information infrastructure. 

The task of actually deploying open platforms must be accom- 
plished by the private sector. If not, the groundbreaking applica- 
tions and systems which have already been developed througn Gov- 
ernment funding such as the Internet will never be accessible to 
the vast majority of the population. 

So, what can Congress do? In my optimistic moments I am al- 
most persuaded that policymakers do not have to do very much at 
all. If all goes well, telephone and cable industries will be per- 
suaded by the logic of self-interest to build broadband networks 
which are consistent with these ideals of openness. 

The moneymaking opportunities are there, I tell myself, even if 
they are unaware or uninterested in the full range of democratic 
goals. 

On the other hand, a more cautious and pessimistic view sug- 
gests that providers may decide there is more safe money to be 
made by offering more of the same kinds of one-way video enter- 
tainment services we have today. 

Or providers in some parts of the country may make the choice 
to retain full control over the content on the network rather than 
make them open. In that case, all of the potential for the national 
information infrastructure that we have been hoping for will be 
squandered. 

Now, specifically with respect to S. 1086, there are two policy 
goals that I think apply equally in the optimistic and pessimistic 



155 

scenarios. The first has to do with universal service for the Infor- 
mation Age. 

The principle of equitable access to basic services is an integral 
part of our policy. We support the notion already in S. 1086 that 
all providers should share in the cost of maintaining universal 
service. 

We also hope that a forward-looking definition of universal serv- 
ice, including multimedia information service access capabilities 
will also be incorporated in the legislation. 

In other words, we have to move from plain old telephone service 
to plain old digital service. Equity also demands that these services 
meet the needs of people with disabilities, the elderly, and other 
groups with special needs. 

Second, we need a new common carriage regime for the Informa- 
tion Age. We have to reshape common carriage duties for new me- 
dial environments. 

The technology is converging, industry structure is changing. 
Telephone companies who were the traditional providers of com- 
mon carriage services are moving closer to providing video. 

Cable television, which would function as program providers, are 
showing great interest in offering telecommunications services. 

Here is what we suggest: Any carrier that is willing to offer open 
platform services as I have described, on a nondiscriminatory basis, 
should be allowed to offer video programming as well. 

By allowing any infrastructure provider to coexist in both regu- 
latory categories, the provider would be encouraged to invest in 
both expanded entertainment services and at the same time make 
real contributions to the development of the Nil. 

EFF proposes that the price for participating as both a video pro- 
grammer and telecommunications provider would be willingness to 
offer true open platform services on the telecommunications side. 
We would like to see S. 1086 amended to include this provision. 

The recent judicial action casts some doubt on the constitutional- 
ity of absolute crossownership bars. We believe that strong statu- 
tory safeguards are constitutional and are certeiinly required where 
content and conduit services are provided by a single network 
owner. 

The very existence of open platform services is itself the most im- 
portant step to promoting diversity of information. Shaping the ar- 
chitecture of the new Nil in a way that promotes easy access for 
all programmers is the most important safeguard of all, if the goal 
is diversity and fair access. 

My third point has to do with the more pessimistic scenario. We 
believe competition is necessary, absolutely necessary, but not al- 
ways sufficient to ensure adequate infrastructure for all. 

S. 1086 wisely recognizes this. Policymakers must not assume 
that the open platform vision I have laid out is self-executing in all 
circumstances. Section 6 of the bill provides that the FCC has the 
authority to mandate infrastructure deployment to meet open plat- 
form standard if it is shown that competitive forces are not making 
such services available. 

We would suggest a proactive regulatory process to have tariffs 
filed for affordable digital services. If the tariffs are inadequate or 



70-334 0-94-6 



156 

if there is some other market failure, then the FCC would be au- 
thorized to intervene under the authority granted in section 6. 

We believe this is a less intrusive approach in that carriers are 
allowed to come forward with plans suggesting the ways in which 
they will meet the needs for open platform services. 

Mandatory authority would only come into play if it is shown 
that the needs as outlined in section 6 have not been met. 

In conclusion, the prescription here is not a heavy regulatory 
hand. Where the market is delivering the necessary services, inter- 
vention should be minimal. But merely lifting existing line of busi- 
ness restrictions will not guarantee tnat the market will delivery 
necessary new services. 

I want to thank you again for the opportunity to appear before 
you on this very important issue. 

[The prepared statement of Mr. Kapor follows:] 

Prepared Statement of Mitchell D. Kapor 
L introduction and overview 

Chairman Inouye, Senator Danforth, and Members of the Committee: I want to 
thank you for the opportunity to come before this committee, and to commend your 
for taking such a strong interest in telecommunications infrastructure moderniza- 
tion policy. I am the Chairman of the Board of the Electronic Frontier Foundation 
(EFF). EFF is a non-profit, public interest organization whose public policy mission 
is to insure that the new electronic hi^ways emerging from the convei^gence of tele- 
phone, cable, broadcast, and other communications technologies enhance free speech 
and privacy rights, and are open and accessible to aU segments of society. To 
achieve these goals, EFF works actively to buUd coalition and consensus among pub- 
lic interest organizations, consumer groups, computer and communications firms, 
and cutting-edge providers of new information services. For those of you who do not 
know me, I am also the principal developer of the Lotus 1-2-3 spreadsheet program 
and served as the CEO of the Lotus Development Corporation between 1982 and 
1986. 

Over the last two years, EFF has been an active participant in the telecommuni- 
cations infrastructure debate. Our chief concern in the past has been to identify eco- 
nomically, technically, and politically practical infrastructure improvements that 
can bring the benefits of new information technology to the American public without 
having to wait until the year 2015 for the deployment of a fiber4o-the-home network 
by local telephone companies. To this end, we have suggested that technologies 
which enable the delivery of video information services over existing copper tele- 
phone lines be implemented while fiber optic deployment proceeds. This effort is still 
vitally important to the development of the nationls telecommunications infrastruc- 
ture. In this testimony, we take the opportunity to ofier a somewhat more long-term 
view of telecommunications regulation. 

II. INFRASTRUCTURE POUCY GOALS 

Before discussing the details of the legislation before us, I suggest that we all step 
back from the inter-industry political squabbles that have long characterized the 
telecommunications policy debate just lon^ enou^ to reflect on what is at stake in 
the development of the national information infrastructure (Nil). Technological ad- 
vances now put in our reach a dazzling array of new information and communica- 
tion capabilities which, if successfully deployed, can revolutionize the way that we 
all live, work, learn, play, and entertain ourselves. I know that this Committee, oth- 
ers in Congress, the Clinton Administration, state regulators, and private industry, 
all share the common goal of developing the NIX. 
The findings of S. 1086 carefully sets out these goals: 

(3) advancements of the Nation's telecommunications infrastructure will in- 
crease the public welfare by helping to speed the delivery of new services, such 
as distance learning, remote medical sensing, and distribution of health infor- 
mation; 

(20) access to switched, digital telecommunications service for all segments of 
the population promotes the core First Amendment goal of diverse information 



157 

sources by enabling individuals and organizations alike to publish and otiier- 
wise make information available in electronic form; 

Today I would like to give you my thoughts on the importance of these two goals 
and ways that they might best be realized. 

A. A Jeffersonian Vision of the National Information Infrastructure 

Properly implemented, the growing infrastructure is nothing less than the new 
printing press, offering as yet unimagined opportunities for personal communica- 
tions, wr building and revitalizing communities, and for the development of vast 
mariiets for tomorrow's information entrepreneurs. The infrastructure cem help busi- 
ness to woik more efficiently, realizing global competitive advantage. And if the in- 
frastructure is truly extended to all parts of the country, rural businesses can com- 
pete in markets previously closed to them. Workers, too, will benefit by being able 
to match their work demands to their lifestyle needs throu^ telecommuting. 

To achieve these and other benefits, we know that we need more capacity than 
is currently available in today's analog voice telephone system. We also need more 
than merely 500 channels oi one-way cable television. Todays telephone system 
does not have enough capacity to enable us to exchange the multimedia information 
sources that will be the staple of our information diet in the near future. And the 
500 channels which many look forward to fail to meet our real needs because they 
only allow one way distribution of information from the network operator down into 
each subscriber's home. The interactivity that is critical for educational services, for 
library access, for online medical assistance, for telecommuting or rural business 
connections and for the next generation of multimedia entertainment, cannot be ac- 
commodated in a one-way system or one with other limitations on its use. 

This is our Jefiersonian vision of the information infrastructure: one that pro- 
motes a rich diversity of information sources and new applications, that creates new 
entrepreneurial opportunities, and that is resistant to the monopolization of infor- 
mation channels and promotes the free flow of ideas. 

1. Promoting Diversity of information Sources and Equitable Access 

Aside from the universal service guaranty, the driving communications policy 
value for the last fifty years has been promotion of the maximum diversity of infor- 
mation sources, with the greatest variety of view points. As we move into the multi- 
media information age, we have a new opportunity to shape communications policy 
in ways that promotes maximum diversity m a way not possible in earlier mass 
media such and broadcast and cable television. 

Historically, the print medium has been the most successful at promoting a diver- 
sity of information sources because it allows easy entry as an iniormation provider 
and easy access as an information consumer (a reader). Compared to both the broad- 
cast and cable television arenas, print is the vehicle for the greatest diversity of 
viewpoints and has the lowest publication and distribution costs. Despite the regu- 
latory steps taken to promote diversity in the mass media, the vexing problems of 
spectrum scarcity and limited channel capacity have always limited the variety of 
opinion and information. 

The switched nature of advanced digital networic technology offers to end the 
spectrum and channel scarcity problem altogether. Broadcast and current cable 
media have a built in distribution bottleneck because of the limited number of chan- 
nels and the hierarchical nature of the distribution system. An independent content 
producer must always negotiate with the channel owner for the abUity to commu- 
nicate with others. In a switched, digital network, of the kind that phone companies 
and cable companies both speak of deploying in the near future, any user can com- 
municate with any other user. The distribution bottleneck caused by having a small 
number of channel-holders is eliminated. Thus, anyone with content to distribute — 
whether to one, one hundred, or one hundred thousand users — can do so without 
the permission or advance approval of the carrier. 

2. The Need For Open Platform Services 

To achieve the fiiU potential of new digital media, we need to make available what 
we call Open Platform services, which reach all American homes, businesses, 
schools, libraries, and government institutions. Open Platform service will enable 
children at home to tie into their school library (or libraries aU around the world) 
to do their homework. It will make it possible for a parent who makes a video of 
the local elementary school soccer game to share it with parents and students 
throughout the community. Open Platform wiU make it as easy to be an information 
provider as it is to be an information consumer. 

Specifically, Open Platform service must meet the following criteria: 

• widely available, switched digital connections; 



158 

• affordable prices; 

• open access to all without discrimination as the content of the message; 

• sufficient "up-stream" capacity to enable users to originate, as well as receive, 
good quality video, multimedia services. 

Open Platform service itself will be provided by a variety of providers over inter- 
connected networks, using a variety oi wires, fiber optics, coax cable, and wireless 
transmission services. But however it is provided, if it is affordable and widely 
available, it will be the on-ramp for the nation's growing information superhi^way. 

B. Public and Private Roles in Infrastructure Development 

Congressional action on the issues raised by S. 1086 is absolutely critical to the 
growth of the National Information Infrastructure as a whole. This year there are 
a number of legislative and executive branch actions contemplated in support of the 
NH. Senator Hollings, through 5A, and Congressman Boucher, through HJl. 1757, 
are both working to promote the development of new network -based applications for 
the Internet and the NREN. Chairman Markey, on the House side, has been hard 
at work on an infrastructure bill which we hope will be introduced very soon. Last 
year, Senator Bums, in S. 1200, also showed a desire to work for infrastructure im- 
provement The Administration has indicated that the National Telecommunications 
and Information Adnainistration will also play a role in funding network access for 
local community institutions such as schools and libraries. These funding initiatives 
are important steps toward making electronic networks more useful to individuals. 

But those fiinding efforts will only bear fruit for Americans if appropriate public 
policy and private sector investment succeeds at extending the on- and off-ramps of 
the data superhighway into Americans' homes, schools, and libraries. This task of 
actually deploying Open Platforms must be accomplished or the groundbreaking ap- 
plications developed through government and private initiative will never be acces- 
sible to the v£ist majority of the population. Any suggestion that the government 
might be able to buUd an Nil througn public funoing is misguided. The government 
has neither the money, as you know, nor the expertise, to undertake such an effort. 
But EFF firmly believes that ^ven the proper regulatory environment, the private 
sector will buUd the kind of mfrastructure that the country needs. However, we 
should recognize that if the infrastructure goals of S. 1086 will not be achieved with- 
out comprehensive, legislative restructuring of telecommunications policy. 

III. PUBLIC POUCY RECOMMENDATIONS 

What can Congress do to ensure that the potential of this technology is realized? 
In my optimistic moments, I am nearly persuaded that policy-makers don't have to 
do much at all. The many announcements of new technology experiments and in- 
creased infrastructure investments by both the cable and telephone industry cer- 
tainly suggest that the private sector is rising to the challenge of building new infor- 
mation imrastructure. U all goes well these industries will be persuaded oy the logic 
of self-interest to build broadband networks consistent with Jeffersonian ideals of 
openness, even if they are unaware of or uninterested in the full range of-democratic 
goals. 

Optimism does not always carry the day, however. If competing cable tmd tele- 
phone companies have too narrow of vision of what will be successful telecommuni- 
cations services, the country will never realize the great potential that Open Plat- 
form services offer. For example, providers may decide that there is more safe 
money to be made simply be offering more and more one-way video entertainment 
services. Or, some infrastructure providers in some parts of the country may make 
the choice to retain full control over the content on their networks, rather than 
make their networks open to a diversity of information, consistent with Open Plat- 
form principles. If these or other less optimistic scenarios are realized, we would 
simply go from 57 channels and nothing on, to 570 channels and still nothing on. 
All of the potential for the NH that we have been hoping for would be squandered. 

Sadly, it does not take much to fail in building the NIL Islands of progressive in- 
frastructure investment surrounded by a few market failures would lead to infra- 
structure balkanization and of disenfrandiising individuals and organizations in un- 
derserved areas. Moreover, the whole country would be left with an incomplete in- 
frastructure. Therefore, if this committee and the Congress in fact find that infra- 
structure growth and full access to the information age is indeed important, then 
active steps must be taken to ensure that these goals are refdized. 

A. Optimistic View: Achieve Social Policy Goals By Reliance on Market Forces. Fair- 
ly Shared Universal Service Subsidy, and Appropriate Safeguards 

To the greatest extent possible, it is wise to rely on market forces to deliver the 
services and functionalities that the public needs as part of the National Informa- 



159 

tion Infrastructure. Federal policy makers should not put themselves in the position 
of mandating a particular technology or of anointing a particular industry as the 
infrastructure provider of choice. Rather, Congress should concentrate on ensuring 
that basic information and communications needs are met, and on creating condi- 
tions for fair competition which protect consumers and providers alike. 

In many areas, vigorous competition among enlightened providers in local ex- 
change markets may well lead to the deployment of Open Platform services that we 
believe are essential to a flourishing NH. Where such deployment occurs, regulation 
can be limited to the interconnection requirements and universal service guarantees 
outlined in S. 1086, as well as comprehensive anti-competitive safeguards. 

Dramatic advances in network technology over the last few years promise to 
render obsolete traditional communications industry categories. Technology exists 
today which enables telephone companies to offer video programming service in 
competition with cable television providers even without waiting until the year 2015 
for the deployment of a full fiber-to-the-home network. By the same token, cable 
companies are already experimenting with systems to offer both voice and date tele- 
communications services over their networks. EFF believes that this competitive en- 
vironment can be a major positive force in bringing affordable Open Platform serv- 
ices to the American public. The competition in video programming could also, of 
course, improve the cable consumer's lot. 

In order to be sure that this competitive opportunity produces real infrastructure 
improvements for the American public, regulation should be structured to meet two 
criteria. 

1. Universal Service Goals for the Information Age 

The principle of equitable access to basic services is an integral part of nation's 
telecommunications policy. From the early history of the telephone network, both 
government and commercial actors have taken steps to ensure that access to basic 
voice telephone services is affordable and accessible to all segments of society. Since 
the divestiture of AT&T, many of the internal cross-subsimes that supported the 
"social contract" of universal service have fallen away. Re-creation of old patterns 
of subsidy is no longer be possible, but serious thought must be given to sources 
of funds that will guaranty that the economically disadvantaged will still have ac- 
cess to basic communications services. 

The universal service guaranty in the Communications Act of 1934 has, untU now, 
been interpreted to mean access to "plain old telephone service" (POTS). In the In- 
formation Age, we must extend this guaranty to include "plain old digital service." 
Extending this guaranty means ensuring that new basic digital services are afibrd- 
able and ubiquitously available. Equity and the democratic imperative also demand 
that these services meet the needs of people with disabilities, the elderly, and other 
groups with special needs. Failure to do so is sure to create a society of "information 
naves and have nots." 

In a competitive telecommunications environment, regulatory paradigms must be 
industry neutral and treat all similarly situated providers equally. S. 1086 sets out 
just this kind of framework by defining interconnection and universal service fund 
obligations for all entities that provide telecommunications service, regardless of 
which traditional industry category they are associated with. So, a cable television 
company that provides voice or data telecommunications service, would have the 
same obligations as any other telecommunications provider, such as a local phone 
company or a wireless service provider. The scope of these obligations should cer- 
tainly be proportionate to the companies market presence, but otherwise, all who 
chose to provide telecommunications services should be subject to the same require- 
ments. We hope that a more thorough consideration of the universal service funding 
mechanisms is included before S. 1086 is reported from this committee. Also, a for- 
ward-looking definition of the universal service level, including multimedia informa- 
tion service access capabilities, must be incorporated in legislation. 

2. A New Common Carriage Regime For The Information Age 

In a society which relies more and more on electronic communications media as 
its primary conduit for expression, full support for First Amendment values requires 
extension of the common carrier nondiscrimination principle to all of these new 
media. Common carriage platforms will be critical as the new electronic public fora 
for politics, culture, and personal communications. They are the soap box, the local 
op-ed page, and the printing presses of the Information Age. If all carriers were to 
limit access to their networks based on the content of messages sent, the oppor- 
tunity for free expression in society would be dramatically limited. 

Re-shaping common carriage duties for new media environments will be necessary 
as mass media and telecommunications services converge and recombine in new 



160 

forms. Telephone companies, the traditional providers of common carriage commu- 
nications services, are moving closer and closer to providing video and other content- 
based services. By the same token, cable television companies, which have func- 
tioned as program providers, are showing great interest in oflering telecommuni- 
cations services. The desire of these industries to cross over into new businesses can 
be a source of great opportunity to consumers, if proper regulatory safeguards are 
put into place. 

Any carrier that is willing to offer Open Platform services on a nondiscriminatory 
basis should be allowed to offer video programming as well. EFF believes that it 
will be possible to structure a regulatory regime in whidi infrastructure providers 
can provide both video progranmiing, and conmion carrier-like telecommunications 
services on the same network. In framing common requirements for aU tele- 
communications carriers, S. 1086 already suggests this direction (see Section 5). By 
allowing any infrastructure provider to co-exist in both regulatory categories, the 
provider will be encouraged to invest in both expanded entertainment services and, 
at the same time, make real contributions to the development of the Nil. EFF pro- 
poses that the "price" for participating as both a video programmer and a tele- 
communications provider, would be willingness to offer true Open Platform services 
on the teleconamunications side. We would like to see S. 1086 amended to include 
this provision. 

A venerable regulatory tradition exists which argues that content and conduit pro- 
viders must be separated in order to guard against anti-competitive behavior which 
could stifle, not enhance, diversity. Recent judicial action does cast some doubt on 
the constitutionality of such absolute cross-ownership bars. However, strong statu- 
tory safeguards are certainly required where content and conduit services are pro- 
vided by a single network owner. We would support safeguards in the tradition of 
antitrust law, that allow victims of discrimination to seek remedies directly from 
carriers. 

The veiy existence of affordable Open Platform services will be the most impor- 
tant step toward promoting diversity of information in the new multimedia environ- 
ment. Shaping the architecture of the new Nil in a way that promotes easy access 
for all programmers is the most important safeguard of all, if the goal is diversity 
and fair access. 

B. Competition is Necessary. But Not Always Sufficient, To Ensure Adequate Infra- 
structure for All 

S. 1086 wisely recognizes that competition is necessary, but not always sufiicient 
to promote the widespread availability of advanced infrastructure (See Section 6). 
Despite the virtues of marketplace competition, poliw m^ers must not assume that 
uie Open Platform vision that I have laid out is sell-executing in all circumstances. 
The importance of having an information infrastructure that promotes diversity, 
and that is accessible to all Americans is simply too great to be left to the vagaries 
of as yet undeveloped markets. 

Section Six of S. 1086 provides that the FCC has the authority to mandate infra- 
structure deployment to meet Open Platform standards if it is shown that competi- 
tive forces are not making such services available: 

If State regulatory authorities fail to achieve the goal of ensuring that tele- 
communications carriers provide consumers in rural markets and noncompeti- 
tive markets with access to high quality telecommunications network facilities 
and capabilities which — 

"(1) provide subscribers with sufficient network capacity to access infor- 
mation services that provide a combination of voice, data, image, and video; 
and 

"(2) are available at nondiscriminatory rates that are based on reason- 
ably identifiable costs of providing such services, then the Commission may 
take any action necessary to achieve that goal. 
"(b) Full Effectuation.— The Commission shall have the authority to pre- 
empt any State or local statute or regulation, or other State or local legal re- 
quirement, that prevents the full effectuation of the goal embodied in subsection 
(a). 

We would suggest, instead, a pro-active regulatory process to have tariffs for afford- 
able digital services. If these tariffs are inadequate, or if there is some other market 
lailure then the FCC would be authorized to intervene, under the authority granted 
by Section bix. We believe this is a less intrusive approach, in that carriers are al- 
lowed to come forward with plans suggesting the ways in which they will meet the 
need lor Open Platform services. Mandatory authority would only come into play if 
It 18 shown that the needs, as outlined in Section Six, have not been met. We believe 



161 

that this proposal is fuUy consistent with the spirit of this bill, and that it will en- 
sure that all Americans have access to Open Platforms services in the near term. 

In order for the Nil to truly benefit Americans, we need more than just transport 
services whidi will carry bits of data around the country. We need to spur the devel- 
opment of applications — the hardware, software, and services — which wiU make the 
>fn truly useful to the country. This will not be done merely by lifting regulatory 
restrictions on the current carriers. Rather, we have to create opportunities for 
small, independent entrepreneurs to develop the Information Age equivalents of the 
PC industries word processors, spread sheets, and data bases systems. In the few 
years that I have been investigating the telecommunications industry, I have 
learned that it is oifierent in many respects from the personal computer industry 
which I came from and helped to found. Perhaps the mosl important difference, 
from a public policy perspective, is that you cannot build a whole National Informa- 
tion Infrastructure in a garage. Steve Jobs and Steve Wozniak could build the Apple 
II in their garage, on their own initiative. And it was that kind of entrepreneurial 
initiative that gave me and others in the software industry the platform on which 
to build the innovative products and services which enabled the personal computer 
industry to grow from zero to $150 Billion dollars in just ten years. 

We need that same kind of innovation in the development of new information and 
communications services, but it won't happen unless Open Platforms are in olace. 
The development of this kind of platform, however, requires more than just a Silicon 
Valley garage, or a small factory in Boca Raton (the birthplace of the IBM PC). The 
development of the Nil requires coordination of many industries — from telephone 
companies, to cable companies, to wireless providers — which are operating in a great 
variety of urban, rural^ suburban, business and residential markets. Failure to 
achieve consistent infrastructure deployment across the country will seriously im- 
pair the useftilness of the new services, and more importantly, will have the effect 
of disenfranchising those communities and individuals who do not achieve adequate 
service. 

The prescription here is not a heavy regulatory hand. Where the market is deliv- 
ering the necessary services, intervention should be minimal. But merely lifting ex- 
isting line-of-business restrictions will not guaranty that the market will deliver 
necessary new services. As Section 6 of the bill notes, regulatory action should be 
authorized to see that a minimum level of connection to the infrastructure is avail- 
able to all areas of the country in the event the maricet does not jprovide such con- 
nection. We encourage the Committee to be sure that the terms of this section give 
regulators a clear mandate for action when infrastructure deficiencies are identified. 

IV. CONCLUSION 

I want to thank you again for the opportunity to appear before the committee on 
this very impwrtant issue. The Electronic Frontier Foundation is committed to work- 
ing with you, as well as a range of public interest and industiy groups to reach con- 
sensus on a new regulatory paradigm that will bring the benefits of new information 
infrastructure to the American public. 

Senator Inouye. Thank you very much, Mr. Kapor. May I now 
call on Dr. Duke? 

STATEMENT OF DR. DAVID DUKE, VICE CHAIRMAN, CORNING, 

INC. 

Dr. DUKE. Thank you, Mr. Chairman. My name is Dave Duke 
and I am the vice chairman of Coming, Inc. I am currently respon- 
sible for managing Coming's research, development, and engineer- 
ing resources. 

As you may know, Corning invented low-loss optical fiber. I was 
personally responsible for bringing this revolutionary product from 
the laboratory to the marketplace. 

I am here today as a technologist, not as a legal expert, to dis- 
cuss this experience, because I believe in this case the past is pro- 
log. 

I believe that many of the obstacles that we faced over a decade 
ago in deploying fiber optic technology in the long-distance market 



162 

are similar to the ones that we face today in deploying the tech- 
nology in the local loop. I believe the solutions are similar as well. 

We do not need to mandate investment in any particular tech- 
nology, whether it be fiber optics or ISDN. Before I get into the de- 
tails of S. 1086, I would like to provide a little history. 

Corning, along with Bell Labs and others, began research into 
optical fibers in the mid-1960's. Most were ready to give up by 
1970, but Coming scientists persisted and made the primary opti- 
cal invention later that year. 

Then the commercial fim began. Coming had to convince reluc- 
tant customers to use glass fiber instead of copper wire in tele- 
phone systems. Our customers just did not buy it. 

AT&T, which owned most of the telephone line in America at 
that time, said it would be 30 years before its telephone system 
would be ready for optical fiber. 

Finally, in 1982, after Grovemment action clearly established 
competition in the long-distance market, the commercial break- 
through happened. MCI took the risk and placed a 100,000-kilo- 
meter order for a new generation of fiber. 

The moral of this story is that a Grovemment decision to create 
a competitive long-distance market stimulated demand for new 
technology, including fiber optics, to better serve subscribers. 

Not only did Coming benefit from this decision, but the Nation 
did. Annual investment in long-distance networks immediately ex- 
panded by more than 50 percent. Long-distance usage increased in 
excess of 12 percent annually and long-distance rates fell by almost 
10 percent annually. 

As an added advantage, the entire long-distance infi*astructure 
was converted to fiber while rates dropped by over 40 percent in 
nominal terms. 

The situation today at the local loop is not dissimilar to the con- 
ditions that existed for the long-distance market in the 1970's. 

Local telephone service is a regulated monopoly, just like long 
distance was two decades ago. Local telephone companies are feel- 
ing the threat of competition, just like AT&T first felt the heat of 
competition by MCI. 

Some companies like Ameritech and Rochester Telephone recog- 
nize this threat and have made some innovative regulatory propos- 
als to deal with it and I applaud their foresight. 

As was the case with AT&T in the 1970's, the local monopoly is 
reluctant to invest in advanced technology, particularly fiber in the 
loop, in the distribution and drop part of the loop particularly. 

Overall investment by local exchange companies has remained 
relatively flat in nominal terms over the last 10 years, at about $20 
billion annually, and has declined in real terms. 

And about $3.5 billion is spent annually on copper wire rather 
than more advanced broadband technology. 

While I believe these monopolies would like to invest at a faster 
pace in advanced technology, a regulatory mine field discourages 
them from moving forward. They are restrained by State regu- 
latory authorities that disallow investment. 

Subsidies from businesses to residential service necessitate mini- 
mal investment to keep rates low. And they are still largely pre- 
cluded from providing the one video service with demonstrated de- 



163 

mand, video programming, which requires investment in fiber op- 
tics and other broadband mfrastructure. 

So, the bottom Hne is, if we are satisfied with plain old telephone 
service over copper wire, then there is no need to act. If we want 
Americans to have higher value services necessary to remain inter- 
nationally competitive, then the local infrastructure must be up- 
graded. This can be achieved without increasing the rates for tele- 
phone service, just like it was achieved in the case of long distance. 

Do not be threatened into inaction by outlandish estimates from 
technoloa^ opponents that broadband technology will cost $450 bil- 
lion to deploy. We estimate the deployment of an interactive 
broadband service over the public network can be accelerated bv 20 
years for a minimal investment of only $23 billion in 1992 dollars 
over that 20-year period. 

I believe that S. 1086 builds on our experience from the past. As 
was the case with long distance, it is based on the fundamental re- 
alization that competition for local communication service can be- 
come a reality and bring enormous benefits to subscribers. 

It is very possible witn today's technology for two or more provid- 
ers to serve most local areas. A similar precondition existed for 
long distance over a decade ago. 

In recognition of this fact, the bill opens up the local loop to com- 
petition. It gives the local exchange carriers more flexibility on 
pricing and freedom to enter into new businesses. 

Whether the bill goes far enough in some areas is debatable. But 
it does include all of the fundamental features to encourage rather 
than discourage investment in advanced technology, as is presently 
the case. 

I believe an enactment of legislation based on the fundamentals 
of S. 1086 would result in the accelerated deployment of an inter- 
active broadband network of networks to serve all subscribers in 
your lifetime and mine. 

And this network of networks would include local telephone com- 
panies, cable companies, wireless carriers, long-distance carriers 
and others all interconnected into a seamless web. 

This is not to say that S. 1086 is perfect as it is. I think there 
will be and must be refinements. But please remember, as refine- 
ments are made, there is a sensitive balance between necessarv 
regulation to ensure fairness and over regulation that will squelch 
investment. 

And please keep in mind that narrowly drawn statutes may 
quickly become obsolete, or worse yet, dampen the dynamic nature 
of this industry. 

Thank you for the opportunity to appear before this panel and 
present Coming's views. 

[The prepared statement of Dr. Duke follows:] 

Prepared Statement of Dr. David A. Duke 

Mr. Chairman, Fm delighted to be here today to present Coming's views on 
S.1086, a historic piece of legislation. 

My name is Dave Duke. Fm the Vice Chairman of Coming Incorporated. Fm cur- 
rently responsible for guiding and managing Coming's research, development, and 
engineering resources. 

As you may know. Coming invented low-loss optical fiber. Earlier in my career, 
I was responsible for bringing this revolutionary product from the laboratory to the 
market place. Fm here today to discuss this experience because I believe in this case 



164 

the past is prologue. My views are those of a technologist/businessman, not a law- 
yer/regulator. 

I believe that many of the obstacles we faced over a decade ago in deploying fiber 
optic technology in the long distance market are similar to the ones that we face 
today in deploying the technology in the local loop. And, I believe the solutions are 
similar as well. 

Fm not here to suggest that you adopt legislation that will mandate the universal 
deployment of fiber optics to every home, school, and small business in America. 
You may find this strange. 

But, I believe that reqpiiring by government mandate the deployment of a specific 
technology, be it ISDN, fiber optics, or something else that may come along, would 
be a huge public disservice. The pace of technological change is too fast; the demand 
for new services is too uncertain; and the industry structure is too dynamic to lock 
communications cEirriers into specific technological solutions. 

Rather, I think we need to focus on creating a new balance between competition 
and monopoly regulation to ensure an optimal environment for the deployment of 
technology in the local loop to serve the subscribers' interests. S. 1086 provides lust 
the framework for such an approach. 

THE IMPACT OF COMPETITION ON TECHNOLOGY DEPLOYMENT IN LONG DISTANCE 

SERVICE 

Before getting into the details of S. 1086, Fd like to provide a little history. Spe- 
cifically, Fd like to discuss Coming's experience with fiber optics in the early years. 
I think it will provide an excellent object lesson on the importance of competition 
as a condition precedent for technology deployment, i^ 

Coming, along with Bell Labs and several foreign companies, began research into 
optical fiber about the same time in the mid- 1960 s. Most were ready to give up by 
1970, when a well-known scientist in the field announced at a prestigious technical 
conference that glass fibers were decades away.2 

But Coming scientists persisted and made the pioneering optical fiber invention 
later that year. In fact, it was in August 1970, 23 years ago. 

Once the breakthrough was made, the commercial mn began. Coming entre- 
preneurs had to convince reluctant customers to use glass fiber instead oi copper 
wire in telephone systems. Imagine, 23 years ago, burying cables underground con- 
taining glass fibers that could carry thousands of telephone calls simultaneously. 
You must admit, it sounded strange. 

Well, our customers didn't buy it. AT&T, which owned most of the telephone lines 
in America at the time, said it would be 30 years before its telephone system would 
be ready for optical fiber. And when it was, AT&T planned to make its own fiber.^ 

At that point, we began to think that we had a technical success, but a commer- 
cial failure. 

Then we took our technology overseas. Frankly, we had a more friendly reception. 
We negotiated some technology-sharing arrangements and formed joint ventures to 
help support further research. 

'The research paid off technically. By 1975, Coming scientists had developed a 
fiber which was an 8,000 percent improvement over their original creation. But still, 
we had no serious customers in the United States. Nevertheless, we built a pilot 
facility in 1976. 

Finally, in 1982, after government action clearly established competition in the 
long distance market, the commercial breakthrough happened. MCI took the risk 
and placed a 100,000 kilometer order for a new generation of fiber, single-mode 
fiber. We took the MCI order, built a fuU scale plant, and started a technological 
revolution. 

The moral of this story is that a government decision to create a competitive long 
distance market stimulated demand for new technology, including fiber optics, to 
better serve subscribers. Our scientific, manufacturing, and manteting expertise 
alone weren't enough. It was a government decision to move toward competition and 
away from monopoly rejfulation that made the difference in the end. Had this deci- 
sion not been made, optical fiber may still be in the lab. 

Not only did Coming benefit from this decision, the nation did. Annual invest- 
ment in the long distance networks immediately expanded by more than 50 per- 



iFor a complete historical account, see Ira Magaziner and Mark Patinkin, The Silent Wan 
Inside the Global Business Battles Shaping America's Future, Random House, New York (1989), 
Chapter 9. 

a Op. cit., p. 274. 

aOp. cit., p. 275. 



165 

cent.* AT&T alone has invested over $20 billion modernizing its own network since 
divestiture.5 Long distance usage increased in excess of 12 percent annually.^ And, 
long distance rates fell by almost 10 percent annually.'' » 

In short, as a result of a decision to move toward competition in long distance 
service, Americans got better quality service, more innovative service, and far 
cheaper service than they would have otherwise. 

And, as an added advantage, the entire long distance infrastructure was rebuilt. 
When the first order was placed in 1982 by MCI, ahnost no fiber existed in the long 
distance network of this countiy.o Today, over 90 percent of the long distance net- 
work is fiber optics. In eleven short years, the network was entirely converted to 
fiber, while rates dropped by over 40 percent in nominal terms.io 

Our experience witn long distance demonstrates beyond any reasonable doubt, 
that competition can drive the deployment of advanced technology while simulta- 
neously reducing prices and improving service. 

CURRENT SITUATION 

The situation today with the local loop is not dissimilar to the conditions that ex- 
isted for the long distance market in the 1970's. Local telephone service is a regu- 
lated monopoly market, just like long distance was two decades ago. 

Another parallel to the long distance experience is the rapid onslau^t of competi- 
tion. Just like AT&T felt the heat of competition by MCI in the 1970's and early 
1980's, the local telephone companies are today witnessing the threat of competition 
from alternative access carriers, cable companies, and wireless technology. 

Some local companies have recognized this threat and are aggressive^ embracing 
it. Ameritech, for example, has made a bold proposal under its Advanced Universal 
Access Plan to completely open its network functions to competitors in exchange for 
regulatory relief. Rochester Telephone has made a similar proposal in New York 
State. 

Finally, as it was the case with AT&T in the 1970's, the local monopoly is reluc- 
tant to invest in advanced technology, particularly fiber in the loop. Let me give you 
some statistics. Overall investment by local exchange companies has remained rel- 
atively flat in nominal terms over the last 10 years at about $20 billion annually 
and has declined in real terms. n And, about $3.5 billion is spent annually on copper 
wire rather than more advanced broadband technology.12 Some argue that the local 
exchange carriers are investing at their depreciation rate, choosing to invest excess 
retained earnings in other more profitable endeavors.i^ 



4 Immediately after divestiture in 1982, investment by inter-exchange carriers increased &x»m 
$3 billion in 1982 to $4.8 billion in 1983. It continued to increase to $6.3 billion in lt*86 and 
since then has trailed off to about $5 billion annually. These numbers were derived from two 
sources: Statistics of the Local Exchange carriers (1993), United States Telephone Association 
(to be released in Fall 1993); and After the Breakup: U.S. Telecommunications in a More Com- 
petitive Era, Robert W. Crandall, The Brookings Institution (1991), Table 3-3. p. 47. 

Robert E. Allen, Chairman, AT&T, Statement before the House Energy and conunerce Sub- 
committee on Telecommunications and Finance, March 24, 1993, p. 7. 

eReal output of interstate switched-message-transfer services ("MTS") and interstate wide- 
area telephone service ("WATS") increased by an average annual rate of 12.1 percent during 
1983 to 1988, the time period immediately following the AT&T divestiture. See After the Break- 
up: U.S. Telecommunications in a More Competitive Era, Robert W. Crandall, The Brookings 
Institution (1991), Table 3-1, p. 44. 

TThe real Consumer Price Index for interstate toll service fell by an annual average rate of 
9.8 percent during 1983 to 1989, the period immediately following AT&T divestiture. Op. cit, 
Table 3-9, p. 61. . . 

*In testimony before the House Energy and Commerce Subcommittee on Telecommunicabons 
and Finance on March 24,1993, AT&T Chairman, Robert E. Allen, elaborated on benefits of com- 
petition in long distance by stating: Particularly in the eleven years since the divestiture decree 
was entered, Se competitive parts of the telecommunications industry have experienced extraor- 
dinarily dynamic growth. Hundreds of new carriers have begun providing long distance service. 
Private business communications networks have proliferated; specialized value-added networks 
have become virtually ubiquitous; thousands of databases provided by hundreds of competing 
suppliers are now accessible over the public switched network; and a sophisticated array of both 
customer premises and network telecommunications equipment is now available to customers. 

»AT&T nad deployed some multi-mode fiber in the Northeast Corridor. But, virtually no sin- 
gle-mode fiber, the technology of choice for long distance applications today, had been deployed. 

10 Supra, Note 5, p. 8. 

11 See Table 1 attached. 

12 Telephony, June 25, 1993, p. 36. 

13 Oral statement of James Q. Crowe, Chairman of MSF Communications Conrmany, before the 
Senate Committee on commerce, Science and Transportation, Subconunittee on Communications 
made on July 14, 1993. 



166 

While I believe these monopolies would like to invest at a faster pace in advanced 
technolog>', a regulatory mine field discourages them from moving forward. They are 
restrained in their investment behavior by state regulatory authorities that disallow 
investment. They can't cheirge market clearing prices for new services made possible 
by investment in advanced technology. Subsi<fies from business to residential service 
necessitate minimal investment to keep rates low. And, they are still largely pre- 
cluded from providing the one video service with demonstrated demand, video pro- 
gramming, which requires investment in fiber optics and other broadband infra- 
structure.!* 

So, the bottom line is, if you're satisfied with plain old telephone service over cop- 
per wire, then there's no need to act. The existing infrastructure can do the job. 

But, if you want Americans to have higher value-added services necessary to re- 
main intemationtilly competitive, then the local infrastructure must be upgraded. 
And, this can be achieved without increasing the rates for telephone service, just 
like it was achieved in the case of long distance. 

In essence, our experience in long distance has proven that Americans can have 
access to advanced services over a modem infrastructure without paying higher 
prices for basic service. 

THE RED HERRING 

Before discussing how to translate the experience in long distance into the local 
loop, Fd like to spend a minute talking about the big "red herring"; that is, the argu- 
ment that numerous groups have made that we can't aflbrd to build this new infra- 
structure because it's going to be outlandishly expensive. 

The argument goes like this. Building a fiber optic network to every home in the 
country will cost $450 bilUon. Absorbing this increased investment wiU raise rates 
particularly for subscribers who want to use the telephone system just to make tele- 
phone calls. The country is bankrupt, and we can't afford to pay the price. 

This argument is a gross exaggeration intended for the sole purpose of scaring 
policy makers away from broadband technology and into inaction. A number this big 
is enou^ to scare anybody. 

But, the reality is, the local exchange carriers will invest $400 bilUon over the 
next 20 years anyway. As Fve already demonstrated, the local telephone companies 
are investing at an annual rate of about $20 billion per year. Telephone networks 
need to be constantly added to and rehabilitated to maintain reliable service. 

At some point, when the cost of new technology falls below the cost of existing 
technology, telephone companies will invest in more advanced technology in the nor- 
mal course of building and maintaining their networks. In other words, the deploy- 
ment of advanced technology could very well become simply a cost driven phenome- 
non. 

If it is, we expect that the entire network could be rebuilt for no additional cost 
whatsoever. However, universal deployment in this situation would take a long 
time. We estimate that universal interactive broadband service over the public 
switched network would not be available until sometime around the year 2035, if 
deployment is solely a cost driven phenomenon. 

Fortunately, we have a choice. If policy makers would Uke to advance the pace 
of deployment, they can do so at a relatively small incremental investment. We esti- 
mate that the incremental cost of accelerating universal deployment from the year 
2035 to the year 2015 is only $23 billion in 1992 dollars, or about 70 cents per sub- 
scriber, per month. 

While $23 billion is certainly a considerable sum, it is nothing like $450 billion. 
And, even if our estimate is off by a factor of 2, a $50 biUion incremental investment 
at the national level spread over 20 years is not something to be fri^tened about, 
especially when measured against the benefits. The Economic Strategy Institute 
measures these benefits at $321 billion in additional GNP.i" 

So please, do not be threatened into inaction by outlandish estimates from tech- 
nology opponents. Certainly cost is an issue. But, it isnt such a huge obstacle that 
it should halt the process or press you to pass legislation that will further discour- 
age investment in broadband technology. 



"The Augtiflt 24, 1993 U.S.' District Court Order to enjoin the enforcement of the cable-telco 
cross-ownership prohibition applies only to Bell Atlantic. The application of this decision to 
other RBOCs remains uncertain at this time. 

18 Economic Impact of Broadband Communications on the U.S. Economy and on U.S. Cwnpeti- 
tiveness, Robert B. Cohen, Economic Strategy Institute (1992), pgs. 1 and 13. 



167 

THE S. 1086 FRAMEWORK 

Now I'd like to turn my attention to the bill in question, S. 1086. I believe that 
the bill buUds on our experience from the past. As was the case of long distance, 
it is based on the fundamental realization that competition for local communications 
service can become a reality and bring enormous benefits to subscribers. It is clearly 
possible with toda/s technology for two or more providers to serve most local areas. 
A similar precondition existed lor long distance over a decade ago. 

In recognition of this fact, the bill opens up the local loop to competition. It does 
this by recjuiring that the local exchange monopoly unbundle its network functions 
and make them available to competitors. In exchange for such openness, the bill 
gives the local exchange carriers more freedom on pricing and freedom to enter into 
new currently prohibited businesses. 

In addition, the bill includes a number of important features: 

• its provisions eire technology-neutral; 

• its provisions are intendedto be provider-neutral; 

• it includes safeguards to protect telephone subscribers against cross-subsidiza- 
tion; 

• it includes safeguards to protect competitors against anti-competitive practices; 

• it includes provisions to guarantee equal access to competitive providers; and 

• it recognizes the need to ensure universal service to subscribers in areas not 
benefited from competition. 

In short, the bill includes all of the fundamental features to establish a new regu- 
latory framework necessary to encourage rather than discourage investment in ad- 
vanced technology, as is currently the case. I believe that enactment of legislation 
based on the fundamentals in S. 1086 would result in the accelerated deployment 
of an interactive broadband 'network of networks" to serve all subscribers in your 
lifetime and mine, not by the year 2035 as we currently project. And this "network 
of networiss" would include local telephone companies, cable companies, wireless 
carriers, long distance carriers, and others, all interconnected into a seamless web. 

This is not to say that S. 1086 is perfect as it is. It is not. It will need refinements 
as the legislative process progresses. 

But please remember, as these refinements are made, that there is a sensitive 
balance between necessary regulation to ensure fairness and over-regulation that 
will squelch investment. Every change that is made in S. 1086 mustl)e measured 
against this balance. After all, the intent of this bill is to encourage local exchange 
carriers and others to invest in local networks. 

Finally, please keep in mind as this bill is refined, that the telecommunications 
industry is rapidly changing. Its dynamism is its strength. Hence, narrowly drawn 
statutes may quickly become obsolete or, worse yet, dampen the industry's dyna- 
mism. 

CONCLUSION 

As you can see, the parallels between the long distance market in the 1970'8 and 
the local market in the 1990's are striking. The problems and the solutions are simi- 
lar. We need to build on our experience from the past in order to build a better fu- 
ture. 

We have this opportunity today with S. 1086. It provides us with the frameworit 
to move forward. Armed with that framewoik and with the experience of the past, 
we can refine S. 1086 and make it a better piece of legislation to serve the public's 
interest and to serve the interests of all the players in the telecommunications field. 

Mr. Chairman, thank you for the opportunity to appear before this Subcommittee. 



TABLE 1— Stagnant LEG Network Investment 

[In billions of dollars] 





Construction ex- 


Construction ex- 




Construction ex- 


Construction ex- 


Year 


penditures in cur- 


penditures in con- 


Year 


penditures in cur- 


penditures in con- 




rent dollars 


stant 1987 dollarsi 




rent dollars 


stant 1987 dollars i 


1983 


17.5 


18.4 


1988 


20.0 


19.6 


1984 


17.9 


18.8 


1989 


18.9 


18.3 


1985 


20.3 


21.2 


1990 


19.3 


18.4 


1986 


20.0 


20.3 


1991 


18.4 


17.4 


1987 


21.9 


21.9 


1992 


20.0 


N/A 



I Deflated by Implicit price deflator for nonresidential fixed investment, producers' durable equipment (see 1993 Economic Report of the 
President, Table B-3. p. 352) 



168 

Source: U.S. Telsphone Association. 

Senatx>r Inouye. Thank you very much, Dr. Duke. I would like 
to begin, if I may, by asking a few questions. Mr. Allen, I am cer- 
tain my colleagues will be touching upon the AT&T-McCaw merg- 
er, so I will stav away from that. 

I think we all agree that there is increasing competition for local 
telephone services at this time. And an important result of this 
competition is that telephone companies are losing some of the rev- 
enues that they have traditionally used to subsidize high-cost areas 
and low-income customers. 

What do you think is the best way to ensure universal service 
in this new competitive environment? 

Mr. Allen. Well, I think, Senator, I would probably take issue 
with your only assumption with respect to whether competition 
may exist in the local exchange. 

I, along with many others, have commended Bill Weiss on the 
bold move they took, or have suggested that be taken, which would 
open up their local exchange for competition, although I think they 
have the cart before horse; that is, seeking entry into long distance 
before competition really exists. 

I think there is very little evidence that in the bottleneck local 
exchange that competition really exists. As I suggested in my own 
testimony and my open remarks, customers who are asked the 
question today, do you have a choice, by and large have to say no, 
they do not have a choice. 

Having said that, I hope that the competition will exist in the 
local exchange at some point in the future. I think it needs to be 
tested. 

I think we need to have methods to determine not only whether 
competition is available, but whether indeed customers are choos- 
ing when competition really exists, that is, whether customers are 
making a choice. 

And as I asserted in my earlier testimony, I think that is one of 
the changes that needs to be made to this legislation, so that we 
will know competition when we see it. 

So, I would take issue with your premise, having said that, and 
hoping that competition will come. And recognizing that adjust- 
ments will have to be made as a result of that, I am very concerned 
about universal service and believe that proper safeguards need to 
be taken at the regulatory level or through direct subsidies, per- 
haps to poor people or others who do not have a choice, who there- 
fore might have their rates potentially raised beyond their aflford- 
ability. I think, however, that is on the margin. 

I also believe that it is not axiomatic, that permitting competition 
into the local exchange automatically means that somebody^s rates 
have to go up. 

In fact, I believe that is monopolistic thinking and is a return to 
the rate base rate of return era that we knew before divestiture, 
which unfortunately still exists in most states, that is to say, com- 
petition forces costs out of the business, and not necessarily a shift 
in cost. 

You may have a shift in cost, in your booked costs, but it did not 
necessarily mean a shift in pricing, and therefore higher rates. 
What competition does is drive out unnecessary costs. And so I do 



169 

not automatically assume that universal service will be in jeopardy, 
because some people's rates have to be increased. 

Senator Inouye. Thank you very much, Mr. Allen. 

Mr. Weiss. Mr. Chairman, may I comment at this point? 

Senator Inouye. Please do. 

Mr. Weiss. It seems to me — to just respond to some of the points 
that Mr. Allen made — having zero percent market share in his 
business, I have pointed out that he has some market share in my 
business. It seems to me that we would not harm them very much 
if we are given freedom to compete on a wholesale basis. 

I would like to point out the issue of our attempting to become 
competitive, as have the carriers such as AT&T. There has been no 
rate increase in my territory for local telephone rates for a period 
of 6 to 7 years. 

As a matter of fact, over that period of time we have reduced 
rates or refunded to customers amounts up to, last year, a total of 
$800 million. So, this is a significant effort on our part to also work 
in the new world that exists. 

Do customers have a choice? I must tell you, today the price of 
providing a local dial tone line in the basic exchange is about 
$1,000. 

It is about $1,100 to provide a line for cellular service. They are 
very close and very competitive, and customers are making those 
choices, even at the local residential level. That will increase. 

There are cases in our industry where people are using cellular 
service as a substitute for a normal wire-base local exchange serv- 
ice simply because it is the most economically efficient way to pro- 
vide that service to customers. So, this is happening. 

You know also, I think, that the regional companies have main- 
tained, in everything they have said or written, a commitment to 
universal service. We think that is a very great public interest mat- 
ter, and we do not intend to step away from that. Thank you. 

Senator Inouye. Thank you very much. I would like to ask you, 
Mr. Weiss, a question, if I may. I think all of us here have sug- 
gested that the goal of this bill is to develop infrastructure to speed 
the delivery of new services, libraries, schools, medicine, et cetera, 
et cetera. 

Which of the following would result in the greater investment in 
the network to attain goals of this bill, allowing the Bell Co. to 
compete for long distance or to compete for cable television and 
video programming services? 

Mr. Weiss. Mr. Chairman, as I tried to point out in my com- 
ments, these markets are all converging. What we are really talk- 
ing about is all of the players in this increasingly competitive mar- 
ket having an opportunity to compete for the revenue of the cus- 
tomer, the consumer, so that they can continue their investment 
pattern in the future. 

It is just about that simple. I think with the long-distance carrier 
being able to move in at will to the local exchange, with the cable 
company being able to move in at will to the local exchange, grant- 
ed there will be regulatory discussions in the process, but when 
that is occurring, they can become full-service provider to consum- 
ers, which is something we cannot do. 



170 

And it seriously disadvantages us in the marketplace. So, again, 
what we are talking about is, as Mr. Kapor stated, I think, the 
broadest level or broadest framework that will permit regulators to 
deal with these situations as they develop on a local basis. 

Both of these are essential for us. Both of these are essential to 
the other players, the long-distance players and the cable players 
in the industry. We are just asking that the rules be equal. 

Senator Inouye. Before I proceed any further, I would like to in- 
vite all of the witnesses on this panel and other panels to submit 
to the staff, if they so wish, suggested amendments with expla- 
nations. 

And the sooner we get that I think the better we can serve all 
of you. So, we would appreciate such assistance and cooperation 
from your side. 

Senator Pressler. Mr. Chairman, could those be shared with 
other members of the committee as they come in? 

Senator Inouye. Oh, absolutely. 

Senator Pressler. Thank you. 

Mr. Allen. Senator, could I make a clarifying point for the 
record? 

Senator Inouye. Yes, sir. 

Mr. Allen. Mr. Weiss and I have been colleagues for many years 
in this business, and our behavior here is not any different than 
it normally is outside the room. And we are good friends and good 
golfing friends. 

But I do have to clarify one point that I do not think is generally 
understood. And that is that the RBOC's today — in fact, all the 
local exchange companies — are in the long-distance business. They 
are essential partners. 

In fact, 40 cents of every dollar AT&T collects, and any other 
interexchange carrier collects on a long-distance call goes to the 
local exchange company as a partner in accessing those local cus- 
tomers for long-distance calls. 

Our analysis indicates that in many cases that of 40 percent, or 
40 cents out of every dollar, which aggregates to $25 billion a year, 
constitutes many times all and sometimes more than the total prof- 
its of some of the entities among the RBOCS, among the telephone 
companies. 

So, they are in the long-distance business. They are essential 
partners — $25 billion is paid to them as essential partners by the 
interexchange carriers. -Ajid last year $250 million, or something on 
the order of 1 percent if my arithmetic is correct, were paid to 
other providers to access our customers, our local exchange cus- 
tomers. 

And therefore, 99 percent of our business is with their customers, 
our joint customers, is done with them. And to suggest that we 
have the right and the capability and are behaving in a sense that 
going direct to their customers, to serve them without the local ex- 
change company, just violates the facts that exist. Thank you. 

Mr. Weiss. Mr. Chairman, I would like to respond. 

In this analogy that Mr. Allen makes, he is absolutely right 
about the percentage of revenues paid to AT&T, in terms of these 
connecting links, but let me tell you how the game is played. 



171 

AT&T customers in Chicago, for example, Sears and Roebuck or 
the First Chicago Bank, are provided service in their basic on- 
premise systems, their large business systems by AT&T. 

That service is collected and delivered directly to AT&T's con- 
necting point in Chicago, so that the long-distance traffic goes di- 
rectly to wherever without touching the local exchange. 

Senator INOUYE. What is the method of connection? 

Mr. Weiss. Pardon? 

Senator Inouye. How do they connect? 

Mr. Weiss. By a competitive access provider. And the issue here 
is that that is not counted in the revenues AT&T pays us, because 
Sears and Roebuck or the First Chicago Bank pays directly to the 
competitive access provider for providing that linkage. 

So, the statistics we are talking about here have to be understood 
in their full context. And I can tell you, in Chicago, we, today, have 
60 percent market share of that special access connecting business. 

So, you can make numbers do anything, but it is the way the 
game is played that we are talking about. And that is why, at the 
local exchange, it is truly a competitive environment today. 

Senator Inouye. Now, we will get out of our box and AT&T. We 
will go to Mr. Kapor. 

We have received suggestions from many sources that, by legisla- 
tion, we require phone companies to deploy certain types of ad- 
vanced technology, such as the integrated services digital networks 
or isometrical digital subscriber line, in order to deliver video over 
today's network. 

Do you think that the Government should promote one tech- 
nology over another or should we leave that up to the open market 
place? 

Mr. Kapor. Quite clearly, we do not think it makes sense for the 
Government to mandate particular technologies. Our emphasis on 
the importance of ISDN, which is a point that EFF has been very 
much involved with, has actually produced some benefits — ^helped 
to produce some benefits — ^in the voluntary undertaking of wider 
deployment of ISDN by Ameritech and other regional companies. 

I won't say that battle is completely over, but many of the goals 
for ISDN as an interim step in infrastructure deployment appear 
to be in the process of being accomplished through voluntary pri- 
vate sector action, which makes us perfectly happy. 

Given in today's environment, which is changing rapidly, techno- 
logically, and in the changing regulatory framework — ^we are also 
not suggesting mandating a technology. 

We have suggested, though, that there is a kind of bargain which 
can be struck, which is that to the extent that we have entities, 
carriers, providing video programming — and being in the entertain- 
ment business — they undertake an obligation to provide open plat- 
form service. 

We envision this applying in a nondiscriminatory way to mginy 
different carriers and also across the full range of whatever tech- 
nologies they choose to deploy these services on. No mandates. 

Senator Inouye. Dr. Duke, you indicated that you are appearing 
as a technician more than a policymaker here. And you spend 
much time on telling us about the value of fiber optic. And we 
I agree with you. 

i 



172 

I think we were late in appreciating that, but do you think that 
this will be the major answer to our debate at this time, the use 
of fiber optics? 

Dr. Duke. Mr. Chairman, I do not think any specific technology 
is the answer to the debate. In my statement, I said we should not 
mandate, you should not mandate, any particular technology — ^fiber 
optics or ISDN or anything else. Things move too fast. There are 
still many applications for satellites and for coax and for fiber and 
different types of fiber. 

So, I do not think any technology is the answer. I think it is a 
policy issue to enhance competition. I think this is what it is all 
about. 

And then, the technology, the innovation, the market, will put in 
whatever is most cost effective; whatever brings the best service to 
improve the quality of life at the best cost. 

Senator Inouye. Thank you very much. I will be calling upon the 
author of the measure, but before I do, if you look at the makeup 
of the subcommittee, you will notice, there is an over abundance of 
Senators representing rural America. And I am certain several of 
them will have questions on rural America. So, you should prepare 
yourselves. 

Senator Danforth. 

Senator Danforth. I would like to thank the panel. I think this 
has really been a very excellent panel. And I appreciate everybody 
being here. And, Dr. Duke, I especially appreciate your testimony. 

I think you are exactly right. The idea is not to change the way 
in which Government gets in the way, but to get us out of the path 
of progress and allow competition to prevail. And I appreciate your 
comments. 

I would like to raise a question to the two golfers and see if it 
is possible to at least narrow what the issue is, so that we can pre- 
cisely understand what the issue is. Tell me if I am wrong. 

The rationale — and Mr. Weiss might contest whether there is 
any justifiable rationale, but the rationale for keeping the Bell com- 
panies out of long distance is that the Bell companies constitute 
monopolies within the regions with respect to local telephone serv- 
ice. 

Those monopolies, in turn, constitute bottlenecks and, therefore, 
if the Bell companies, which, if they have monopolies for local serv- 
ice, get into long distance, that is an unfair situation. 

That is the rationale, is it not, Mr. Allen? 

Mr. Allen. That is the rationale. And that was the basis on 
which, as you know, the divestiture or the breakup of the Bell Sys- 
tem occurred. And that was the linchpin. And, obviously, that has 
worked well in separating the competitive from monopoly busi- 
nesses. 

Senator Danforth. Now, the converse of that would be that if 
there was competition within a region — if there was competition for 
local telephone service — the rationale for keeping the Bell compa- 
nies out of long-distance service would no longer exist. They would 
be comparable to anybody else who wanted to get into long dis- 
tance. 



173 

Mr. Allen. Customers, first of all, would have choices. And sec- 
ond, they would make choices, when there is some point at which 
it is clearly demonstrable that competition exists. Yes. 

Senator Danforth. Yes. Now, you, I think, Mr. Allen, said some- 
thing which is very, very interesting and very important. And you 
said what we need is methods of determining whether competition 
exists and that you recommended changes in the bill so that we 
know competition when we see it. 

Now, what I am wondering is: Would it be possible to focus on 
the definition or to focus on the test? What does constitute competi- 
tion? This is, really, how we approached the cable legislation, try- 
ing to determine what it was that created the threshold of competi- 
tion. 

Is it possible to agree on what the problem is, namely, how to 
define competition? And second, is there any possibility that we, 
you and those of us on the committee and others, could try to come 
up with some definition, some test of what constitutes competition 
and what does not? 

You, Mr. Allen, said, "There really is no competition now." 

And Mr. Weiss says, "Yes. There is competition." 

Obviously, that is a very, very strong difference of opinion, but 
is there a possibility, without getting into what your difference of 
opinion is right now, to try to concentrate on how do we define 
what the issue is? 

Mr. Allen. Well, I do not have a comer on the market on this 
subject. And I am not sure that anyone else does. I would suggest 
that what you did with respect to cable is probably not — or some 
structure like that, some framework — is not the question in my 
mind. 

And, indeed, to the extent that we disagree on whether competi- 
tion exists in small or large segments of Ameritech's market or 
somebody else's, I think, can be measured by — ^in some terms, on 
the basis of do customers — can they answer "Yes" to the question: 
I have a choice of some other carrier to provide my local exchange 
service, whether it is the Sears in the world or the local exchange 
customer who lives in Peoria? 

And there ought to be some point at which choice exists. That 
would be the first guidepost in the framework. That is to say, I 
think, in the cable bill legislation you talked about 50 percent, as 
I recall. 

The 50 percent — at least, 50 percent in a given territory or area 
or market have a choice. Ajid that some percent are actually exer- 
cising and have exercised that choice. 

And perhaps, I do not know what that number ought to be, but 
maybe it is 25 percent. And I think if you could segregate markets, 
territories, regions, areas or some relevant markets, that some test 
like that might be applicable and would be some matrix, at least. 

Now, I am sure there are other people who have different ideas 
about matrix, but that would be one way. 

Senator Danforth. Mr. Weiss. 

Mr. Weiss. May I respond. Senator? To Mr. Allen's point of 
choice, if you ask Sears the question, they will say "Yes." If you ask 
somebody in Peoria, they will say "Maybe." And it totally defines — 



174 

it gets to the point of how do you define the markets that exist in 
the local exchange. 

There are, as I tried to point out in my opening comments, many 
markets in the local exchange. And the interesting fact is that mo- 
nopolies exist today only where somebody else has chosen not to 
enter the market. 

Now, any businessman thinking about that understands why 
thev have chosen not to enter the market. It is because they cannot 
make the highest margins there. 

And generally, that remains the last vestige of what people 
would call a monopoly. But with alternative technologies available, 
like local exchange compared to cellular service — ^to do the same 
thing, to make telephone calls, either local or long distance, cus- 
tomers have a choice today, not among just two, but three provid- 
ers in most cases. 

With the FCC moving forward with further frequency allocations, 
we will have multiple providers in every local exchange in the 
United States. And I would suggest that AT&T will probably follow 
their business strategy, as I understand it looking from afar, and 
will continue to move into the wireless business as a direct contact, 
an end-to-end kind of contact with the customer. 

So, I think we could get to a broad definition of "competition," 
but then I think we have to get down to what is a local exchange 
versus what is the intercity business or the toll business? 

And what are the elements? And where does competition exist? 
And I think, rationally, it exists in far more of the industry than 
we have ever really been willing to talk about to date. 

Senator Danforth. Well, my point is that it would be possible — 
in fact, I think this should be the policy, but it would be possible 
for Congress to create a policy which said that if there is competi- 
tion, then the Bell operating companies should be able to get into 
the long-distance market. 

Mr. Weiss. I would agree. 

Senator Danforth. Now, if we created such a policy, then the 
question — the next question — it's a hard question — is, all right, 
what do we mean by "competition"? That is a definitional issue. 
And obviously, it would be a contested definitional issue. 

It just seems to me that that is where the contests should be tak- 
ing place, now, between the Bell operating companies and, you 
know, others who are — ^AT&T and whoever is concerned about the 
Bell operating companies getting into long distance. 

And what I am asking is: Would it be fruitful? In the few days 
that exist, I hope, before this bill goes to markup, would it be pos- 
sible and would it be fruitful to try our hand at defining just what 
this — what the meaning of "competition" is? Is that a worthwhile 
pursuit and would your two companies participate in that pursuit? 

Mr. Weiss. I think, yes, but I have some concerns about how this 
would be legislated here at the national level. If you look at the 
progress made a number of State regulatory agencies today, they 
are making judgments about each element of the local exchange 
which is going competitive. 

And then they change the rules for that portion, compared to 
some other portion, where they still see the local provider, the Bell 



175 

Co. or whatever, being — ^having monopoly control. And that is un- 
folding. 

They do not tend to use any system of matrix, because tech- 
nology will move around matrix so quickly that they just cannot 
stay in place. 

What they tend to do is look at the exchange, look at all of the 
evidence — ^you know, the growth of the exchange, the revenues and 
so forth, and how they are divided — and they make a judgment. 

That kind of broad supervision is certainly possible, out to get 
beyond that, when it is so difficult at the Federal level for us to 
change some kind of a matrix, once established 

Senator Danforth. I am not talking about, you know, making a 
lot, but, I mean, what we did in cable was to say that, you know, 
the question is the existence of multichannel providers. 

And it was not — ^in other words, it was not in any effort to be 
in any way specific or detailed. It was a very general kind of a defi- 
nition. 

Mr. Weiss. That is possible, I think. 

Mr. Allen. We would certainly be willing to cooperate in such 
an effort. In deference to your disdain for a judge making commu- 
nications policy, I would, apologetically, at least, remind you that 
I there is a provision in the decree for triennial review to determine 
whether market conditions have changed, so that the restrictions 
can be lifted. 

That is another avenue here for pursuit, but we certainly would 
be pleased to work with you in trying to find what do we mean by 
"competition"? How do we know it when we see it? And at what 
point does it make sense to alleviate all restrictions? 

Mr. Weiss. And, Senator, in the 10 years since divestiture, we 
have had one triennial review completed, which tells you some- 
thing about the speed and efficiency of that process. 

Senator Danforth. We do not like courts either. 

Mr. Weiss. For a regional company to get a waiver, the average 
timespan of a waiver being completed and granted is 5 years. This 
' industry will move past mat so quickly that that is not an ade- 
quate way in which this industry can be governed. 

Mr. Allen. I was not recommending. And I am just reminded 
that we do have another alternative. And it is timely. 

Senator INOUYE. Thanks. Senator Pressler. 

Senator Pressler. Thank you very much, Mr. Chairman. 

I am just following up. Indeed, I would not say that this is nec- 
essarily a rural State question. I think it could be an inner city 
question or it could be a question in New York State, where there 
are smaller communities. The local telephone companies currently 
have universal service obligations. 

They argue that opening the local loop will allow competitors to 
cream, skim, or cherry-pick — that is, serve the most lucrative cus- 
tomers, while ignoring the others. 

S. 1086 attempts to address this problem by requiring all car- 
riers to contribute to the imiversal availability of affordable phone 
service. 

Now, Mr. Allen, you suggested any subsidies should generally be 
provided directly to the end user. Would subsidies to end users en- 



176 

sure that new services are brought to higher cost service areas 
These may not be rural areas in all cases. 

A United States Telephone Association study estimated that local 
telephone service is subsidizing universal service at $20 billion an- 
nually. Are you in agreement with the findings of that study? 

After you have responded, anybody else who wants to make a 
comment is welcome to. 

Mr. Allen. Well, first of all, I think there's adequate history that 
demonstrates there are adequate resources at the State level — pub- 
lic utility commissions and otherwise — to protect those who poten 
tially cannot afford telephone service or other services for that mat 
ter. 

And, therefore, while I think it is a very important issue and 
needs to be dealt with and it is one that we commit to, even 
through the subsidy that now flows from our long-distance rates to 
the local exchange and, indeed, to those of low-income and in rural 
areas, I do not believe that is a concern that — it is a concern for 
this committee and this legislation, but I think that can be dealt 
with, perhaps, at the State level. 

One of the difficult questions, obviously, is determining who 
should be subsidized. And I do believe that we must face the fact 
that modernization of the local exchange — and I am not in that 
business and so this is an opinion — will logically come, as it has in 
the past, to the larger metropolitan areas first, because that is 
where more customers are. 

That is where you get the most efficient investment. And, typi- 
cally, if you look at the history in this industry, the newer tech- 
nology has come to the larger areas first and then it has followed 
along. 

That does not mean they have to be denied. It is a question of 
timing, a question of affordability on the part of the telephone com- 
panies to make the huge investments that are required to upgrade 
all of the facilities. 

So, I do not think we have to sacrifice that. I think that we have 
to be realistic about how capital investments are made. 

I am not familiar with the study, which you cite. So, I have no 
comment about that. 

Mr. Weiss. Senator Pressler, technology today is permitting us 
to do a much better iob of providing advanced capabilities in the 
rural or the less populous areas of any given territory. 

For example, in the provision of ISDN service, we will have, in 
my territory — and this is not too different in the other companies — 
about 80 percent of the businesses or residences. They will have 
this service available to them by 1995. 

Now, when I say 80 percent will have it available, what I am 
suggesting is we have equipped the central offices and related tech- 
nology with the frames in which the plugging units are placed 
when a customer orders service. 

What it does is keep our investment low for the moment, but 
makes it available on an instant response for the customer. That 
is what is happening with the ability of technology today. And it 
is a very forthright way of going about it. 

The subsidy question, though, must be dealt with. I would only 
add to what Mr. Allen said, I think, by saying it is both a State 



177 

and Federal Communications Commission issue. It has got to be 
dealt with at both levels. 

Senator Pressler. I would address this to Mr. Allen and anyone 
else. 

S. 1086 is designed to open the local telephone loop to competi- 
tion. You have stated that competitive forces are the best way to 
spread delivery of advanced telecommunications services. 

For example, when AT&T faced stiff competition in the long-dis- 
tance market, you accelerated investment, as I understand, in digi- 
tal fiber technology and wrote off billions in older analog, but still 
serviceable plants. 

Why would local telephone competition encourage similar invest- 
ment and who will pay for the investment — ^ratepayers or share- 
holders? 

Mr, Allen. Well, in final analysis, ratepayers pay for everything, 
even though you may book a shareowners loss at a given point in 
time to update your technology, which is what we did when we 
wrote off $6.7 billion of analog equipment. 

And so our shareowners took the hit on that, but it was man- 
dated by a competitive marketplace, in which we operated at that 
point in time. 

I believe, while competition may not be applicable in every aspect 
of the local exchange company, for reasons that you ana others 
have cited about concern for rural areas and for poor people who 
cannot afford higher rates and so forth, I believe that incentives in 
a competitive marketplace will drive the local exchange carrier or 
any other provider to put forth the best possible technology, in 
terms of price and performance, service and so forth. 

And so — otherwise, you have to say, "Well, I cede a certain por- 
tion of my market to competitors, becau'^e I am unwilling to make 
the investment." And so I think the natural forces of competition 
provide those incentives. 

Senator Pressler. Mr. Weiss, I know you are testifying on behalf 
of all seven regional Bell companies. At the same time, I under- 
stand your company, Ameritech, has taiken a somewhat different 
approach to local competition than the other Bell companies. 

Would you briefly describe the Ameritech plan pending before 
the FCC and is congressional action needed for Ameritech to imple- 
ment this plan? 

Mr. Weiss. Yes. I would be happy to do that and then make a 
couple of comments about it. 

The Ameritech plan is simply a plan to totally open the local ex- 
change network to any provider using any component of that net- 
work that that provider chooses to complete his or her service offer- 
ing to the customer. 

So, what it does is it is fully open to local exchange in its piece- 
parts, if you will, and permits access to those parts on the cost-base 
pricing basis to competitors who would enter the market. 

Now, our philosophy is fairly simple. Over time, it is going to 
happen anyhow. And No. 2, we believe that if we make ourselves 
more available for others, our network will grow or the components 
of our network will grow. So, we do not see this, in my case, as a 
necessarily losing business proposition. 



178 

On the other hand, the conditions across this country served by 
the seven regional companies, do differ. Each of the regional com- 
panies has a plan that will move toward these same goals thev are 
talking about and working with at either the State or Federal level. 
So, it is an issue very much in the minds of the regional companies. 

We have simply said, in our case, that we think it is so impor- 
tant to get these policies cleared up for the country that you need 
a place to try. 

You need a place to go as far as you can go and see if it works 
and learn from it, and then create policies based on those findings. 
That does not need to be done everywhere, but it does say that all 
of the companies stand ready to move ahead in this competitive 
provision. 

Senator Pressler. Mr. Kapor, how would you define "universal 
service" in the Information Age? I know that the Communication 
Act's guarantee of universal service must mean more than access 
to plain old telephone service. 

In a digital world, universal service should ensure access to digi- 
tal technology. Advanced commimications capabilities are a vital 
ingredient for economic development initiatives. 

That is what my community leaders seem to want, up-to-date 
digital switches and advanced telecommunications services. How 
would you define "universal service" in the Information Age that 
we are in? 

Mr. Kapor. Let me emphasize two aspects of universal service 
for the Information Age. The first is that it must have the char- 
acter of a switched network. 

The way today's telephone network is, anybody who is on the 
network can talk to anybody else. That is in contrast to today's 
cable television networks that are one-way networks in which all 
programming originates at a head-end and comes out to subscrib- 
ers. To promote diversity, the network has to be switched. 

Second, there has to be enough capacity in the network to let 
people originate — this is users, at the community level — schools, 
hospitals, towns — their own sources of programming. 

In other words, something which is more symmetric. It is not suf- 
ficient to have a system in which subscribers can simply receive 
video programming, but it has to be easy for somebody who is on 
the network to originate some form of interactive video. That is the 
way that town governments will be able to talk to their citizens 
and school districts and so on. 

So, there has to be enough bandwidth in the network, in the up- 
stream direction, to permit people to originate programming. 

Senator Pressler. This is my final question. I will submit the 
rest of my questions for the record. Mr. Duke, you tell a compelling 
story about how the AT&T divestiture and emergence of MCI 
spurred investment in fiber optic networks. 

You note that overall investment by local exchange companies 
has remained flat over the past 10 years and change is needed to 
stimulate similar investment in the local loop. 

You specifically mentioned that State regulatory bodies may dis- 
courage such investment. How do current rules discourage invest- 
ment and what effect would the changes you recommend have on 
universal service? 



179 

Dr. Duke. Well, Senator, again, I'm not a regulatory expert, but 
my experience is that the public utility commissions look at what 
is the cost of — at the moment, telephone service, plain old tele- 
phone service. 

And if any investment comes in which would enhance the serv- 
ice, like Mr. Kapor talks about, since the local telephone exchange 
or the local telephone company may not carry that enhanced serv- 
ice, then the PUC's do not agree with an additional tariff. 

I would like to add to what Mr. Kapor said. I think if we are 
going to have the broadband information highways and the quality 
of life we all talk about, we must have a switched network. 

It has got to be point-to-point. It has got to be broadband. And 
it has got to be two-way. And at the moment, if you have the PUC's 
which are looking at that in terms of telephone service, then the 
cost of this network will be higher. We must enhance the services 
and put more things on the network. 

Senator Pressler. Thank you, Mr. Chairman. I have several ad- 
ditional questions, which I will submit for the record. 

I thank the panel. I think it is an excellent panel. 

Senator Inouye. Thank you. Senator Burns. 

Senator Burns. Thank you, Mr. Chairman. I am sorry I missed 
out on the statements, but I will read and I have read most of 
them. And we will get into the questions. 

First of all, I want to congratulate Mr. Weiss and Mr. Allen, 
both. They have made some extraordinary moves with a little vi- 
sion and boldness to advance not only their own companies and 
corporations, but also would tell the rest of America that there are 
things that are going to happen in this great industry whether 
Congress moves or not. 

And I congratulate both of you. And I do not know what the ne- 
gotiations would be like on the first T-box. I cannot even imagine 
what lunch would be like, but I would imagine that the negotia- 
tions starts much before we arrive at the parking lot. 

With regard to the reports and the editorials in the Wall Street 
Journal — and I would ask of both of these gentlemen about safe- 
guards and what safeguards that we can develop in the legislation 
to protect residential and rural communities in this connection. 

I'm recalling our experience under the airline deregulation. Even 
those who believe in airline deregulation, they believe it was un- 
wise, but it is impossible to return to the old system. In other 
words, you cannot put Humpty Dumpty back together again. 

And so I would just like to get some type of comment from both 
of you that would ensure that States, such like Montana, and the 
inner city areas, where there are limited resources for investment, 
and those areas are protected and will be — these services will be 
made available to those people. And I guess I am saying about uni- 
versal access. 

And Mr. Weiss, if you want to respond to that, and then Mr. 
Allen, I would appreciate that. 

Mr. Weiss. Well, one of the safeguards that has to be clearly in 
mind is this issue of the subsidies. It is a carryover from the old 
monopolistic industry. And it still exists. 



180 

And it has got to be dealt with, because that, in fact, will make 
a difference if it is not dealt with, particularly between the rural 
areas and the metropolitan areas. 

It seems to me that in the broad area of safeguards, what we are 
really talking about here is looking at the various elements of who 
provides what within this industry and establishing the rules of 
the game in such a way that no party is disadvantaged. 

We have never opted for anybody to be disadvantaged in any 
kind of rulemaking. And I think it is important for legislation at 
this level to start there and craft this set of governance issues on 
that basis. 

Mr. Allen. I do not have any disagreement with Mr. Weiss. I 
think my words would be superfluous on the issue. 

Senator Burns. Well, is it true that AT&T and other long-dis- 
tance carriers are being prevented to compete against Bell compa- 
nies and other telephone companies in the provision of inter-LATA 
toll service? Mr. Allen. 

Mr. Allen. Inter-LATA toll? 

Senator Burns. Yes. Well, I mean, what does inter-LATA com- 
petition mean for universal service goals? In other words, that is 
a goal that we have seen to have embraced and latched onto. 

Mr. Allen. Well, first of all, there is no competition today be- 
tween the local exchange companies and interexchange carriers 
and inter-LATA services. That is one of the restrictions in the de- 
cree. 

There have been some States in which competition has been open 
for intra-LATA services by local exchange carriers and 
interexchange carriers. And I do not think that number is very 
large, but perhaps half of a dozen at the outside. 

And I do not think we have a lot of experience there, but it cer- 
tainly will drive — to the extent that prices, precompetition, were 
higher than costs, it will tend to drive margins down — ^prices down, 
margins down. 

And therefore, to the extent that that was a subsidy for other 
services, it must be dealt with by the local exchange carrier. And 
you can either take the costs out or you can get your regulatory 
body to shift the costs some place else and perhaps the pricing, but 
it does, potentially, present a problem for protecting imiversal serv- 
ice in rural areas where, typically, customers do not pay for the 
cost of providing the service. And so it is something that has to be 
watched very carefully. 

Mr. Weiss. To your point on competition. Senator, there is no 
competition, as Mr. Allen said, in the inter-LATA business, which 
is the intercity or between the areas served by local exchange com- 
panies. 

Now, within the local exchange 

Mr. Allen. There is competition, but not between us. 

Mr. Weiss. I am sorry. What did I say, Bob? 

Mr. Allen. You said there is no competition. 

Mr. Weiss. There is no competition between us and AT&T or 
MCI for that service, between cities. Now, within the LATA or 
within the local exchange territory, there is what some regulatory 
commissions still call toll service and others call it different things. 



181 

For example, Chicago, which is a local exchange area that is 
about 80 miles long — it goes from Indiana to Wisconsin in terms 
of its broad dimension — there is no toll service. It is all local meas- 
ured service. 

And a call made from one point to another is an accumulation 
of local message units as the call is made. 

In Indiana, between Indianapolis and Muncie, which are in one 
LATA or in one serving area, so to speak, it is a different rate 
structure. And there is a toll route between Indianapolis and Mun- 
cie that is within the LATA and is not within the intercity or the 
inter-LATA definition. 

So, when I talk about trying to design some kind of a matrix that 
would permit sanity to prevail here on market entry, that is the 
difficulty we have. There just are so many variations on the theme 
that it is not possible to do that, in our opinion. 

Senator Burns. Well, I would ask Mr. Weiss, we have heard that 
the R-boxes want to get into the long-distance business. And I con- 
tend that there is enough competition in that area right now to 
provide customers with a competitive market with regard to access 
and price. 

Then, on the other hand, with the move that AT&T has made 
with cellular or wireless, and they are asking for some protection 
to keep the Bells out of the long-distance business, I would say that 
I do not know how to fashion or craft legislation to promote place- 
ment of all of the work that Dr. Duke has done. 

By the way. Dr. Duke, I want to congratulate you. You are an 
American hero, as far as the information service is concerned, in 
developing this broadband stuff. 

But to develop this technology and deploy it — ^how to fashion that 
and to allow competition in both long-distance and in local loop 
competition. 

Mr. Weiss. What I am talking about is we have a responsibility 
to the industry systems. We are free to maintain that. There is ex- 
ample after example of market share, because we are going up 
against competition that has structural advantage over us. That is 
the issue. There is adequate capacity in the inner city network. 

Somebody would have to be foolish with their investment to want 
to build another inner city network, conditions being what they are 
today. 

Senator Burns. Mr. Kapor, in your testimony before the House 
Telecommunications Subcommittee in January you said, and I 
quote, "The challenge for public policy is to promote widespread af- 
fordable deployment of ISDN by local telephone companies." 

In an August article in Wired magazine, you indicate that the 
Nation needs a system of high bandwidth, open architecture, and 
distributed two-way switching. It seems as though your position 
has evolved? Am I correct in that? 

Mr. Kapor. I think you are quite correct. If my memory serves 
me well, when I testified in the House, in that testimony, I indi- 
cated that the move toward ISDN should be seen not as an alter- 
native to broadband, but as an interim step toward broadband. 

In the context of those remarks, it made a gpreat deal of sense, 
because it is only within the last few months that we have seen 



182 

this dramatic acceleration toward broadband deployment, particu- 
larly in cable television, but also among the telephone companies. 

Our feeling is that ISDN is actually well on the way to becoming, 
if not ubiquitous, widespread, because of moves by Ameritech and 
Pacbell and other regional companies and the rapid advancement 
of the technology of broadband. 

The conclusion that broadband was economic to put in place 
todav by companies, because they did not need to do full fiber to 
the home, but fiber to the curb and use coax the rest of the way, 
and the opportunities that the provider sees for getting revenue 
through entertainment, all suggested that broadband is coming, 
one way or another. 

And we think that is terrific. We, therefore, turned our efforts, 
as I did in the Wired magazine article, to consider, since we are 
getting broadband and we will have hundreds of channels, how is 
the public interest going to be served in the broadband regime? 

And so we are, indeed, focusing our attention very much on that 
issue. 

Senator Burns. Mr. Duke, you testified that, incrementally, de- 
ployment of a broadband or fiber optic technology probably at a 
cost around of only around $23 billion. 

We have heard much higher estimates of that. Can you tell us 
how the reason or how you come to that conclusion? 

Dr. Duke. Well, yes, Senator. We have done some studies and 
there have been several others — Delloite Touche and others — which 
we could provide you with some of the details. If you look at the 
investment now in local distribution, it is about $20 billion a year. 

When people talk about $400 billion or something like that, they 
include all of what would be done anyway. 

The incremental costs of running fiber to the curb or the final 
drop to the home is, we estimate, about $23 billion over about a 
20-year period of time, or about 70 cents per subscriber per year. 
And some of the independent studies that we saw were about 66 
cents. So, they are very close to what we calculated. 

Senator Burns. Mr. Chairman, in the essence of time, I have a 
couple of other questions for both Mr. Weiss and Mr. Allen, but we 
have a tremendously long day. And I know some of my colleagues 
have questions, too. 

And I appreciate both your time and being very open with us 
here and what we are trying to do in this tremendous industry. 
And I thank you for that. 

Thank you very much. 

Senator Inouye. Thank you. Senator Stevens. 

Senator Stevens. I am conscious of the time, too, but let me say. 
Dr. Duke, I admire your background and only wish we had some 
way to turn loose the technology that deal with some of the prob- 
lems I face, which I will be discussing with vour colleagues. 

Mr. Allen, I spent the last part — a part oi the last month discuss- 
ing matters with your representatives, with GCI, which is like 
MCI, as you know, in our State, and Alascom people, discussing 
this bill. 

And as I got into it, I found out that I was dealing with the 
wrong subject. We really ought to be talking about the survival of 
telecommunications in my State, in view of the fact that your com- 



183 

pany has indicated that it will soon replicate the existing delivery 
system in the State, because it is cheaper to do that, because of 
new technology, than to buy out Alascom. 

Now, that taught me a lesson, I'll tell you, very quickly, that the 
tumbling technology does bring about what Dr. Duke mentioned, a 
total reduction in cost of new systems. 

And we are now in a situation of trying to figure out what is 
going to happen. I do not want to color that with you. I do not 
Uiink that is fair here today, because we are dealing with another 
subject. 

I want to get back to what I mentioned at the beginning. I am 
of the opinion that this bill gives the FCC a tremendous amount 
of new authority. We have all endorsed it overwhelmingly. 

Yet, I think the FCC are the busiest paperhangers in the State — 
in the Nation's Capital right now. They have so much to do. I am 
not sure that they can perform what they would have to perform 
here, particularly in view of the fact that I think that the authority 
of this bill completely will eliminate the State regulatory authori- 
ties. 

And I would call your attention to section 6. One of you men- 
tioned section 6. If the Commission finds that the existing carriers 
fail to provide service under two categories, sufficient network ca- 
pacity, basically, and nondiscriminatory' rates that are reason- 
ably — ^based on reasonably identifiable costs, then the Commission 
can take over or take any action that is necessary to achieve the 
goal of the bill. 

Now, in my State, that is worrisome to me, because of the identi- 
fiable costs concept. We have not had rate regulation based upon 
identifiable costs, particularly rural areas. My State is one-fifth the 
size of the United States. 

I do not need to tell you. It is 3,000 miles from east to west and 
2,500 miles north to south. I would urge you gentlemen to give up 
golf and take up a little marine research and come up my way and 
try the rivers of Alaska and learn how big it is, and to try to make 
a call from there. 

In the article I mentioned, that the lessons of AT&T cellular 
move, it is pointed out that McCaw already offers toll-free calling 
on its cellular network in what it calls the city of Florida. 

I am interested in the city of Alaska. And the problem with it 
is right now, is trying to decide what this bill is going to do to our 
system. 

As I said, when I came to the Senate, Mr. Allen, the Army pro- 
vided our communications system. They sold it to RCA, then PTI 
came into Alascom. And now you are coming in. 

I am trying to figure out, if you are coming under this bill, what 
happens to us? And that is my question to you. That is not unfair, 
I do not think. 

It does seem to me that there is very little protection in here for 
a State that is interested in the carrier of last resort concept. And 
there is very little protection here for a State that still believes 
that telephone service ought to be equated to postal service in the 
sense of having a rate base that provides a commonality, whether 
you are in Kotzebue or Ketchikan or Anchorage. Your cost to a 
family and to a business should not be that much different. 



184 

Now, is it possible that we are going to be able survive under 
this bill, Mr. Allen, if you come in? And I think you are coming. 

Mr. Allen. Well, Senator, first of all, you are to be commended 
for your long history of being concerned about and protecting the 
people of Alaska in this particular area that I am familiar with and 
I am sure in other areas, as well. 

And of late, I believe you have joined the belief that competition 
will be good for your customers in Alaska. And that is one of the 
reasons why I hope you welcome us there. 

We are, indeed, today, every place we serve, whether we wish to 
be or not, the long-distance carrier of last resort. It is a part of our 
service history. 

It is part of our belief about universal service. It is a part of our 
culture. And, indeed, it is a part of the result of divestiture, when 
we were the only interexchange carrier in many locations. 

And the competition did not choose to serve many of those areas, 
because they tend to be low-margin areas and questionable in 
terms of their investment. 

I am proud to say that we have not abandoned any area in this 
United States. And if we come into Alaska, I can give you the same 
kind of assurances there. 

We will come in there on a business proposition that we hope is 
successful. And we will have to align our costs appropriately and 
our rates appropriately to do so, but if we come into Alaska, you 
can bet that we will serve your customers. And while we will not 
identify ourselves as the carrier of the last resort; that is, in fact, 
what we will be. 

Senator Stevens. Well, I appreciate that. As a matter of fact, 
your former associate, Charhe McCord and I used to argue at 
length about whether AT&T should come in when we became a 
State. And I still — if it would be about — ^you know, about the price 
of McCaw, better off if you had. 

When I was there this last month, I ran into a situation where 
there is a small village on the west coast, where it costs $70,000 
to put in a new switch. 

It costs about $10,000 a year to maintain it. It has about an 
$8,000 revenue — an $8,000 annual revenue. And I understood what 
was told me at the time, that the reason that that switch was put 
in there was that a company likes to be able to tell its consumers, 
nationally, that it can deliver its calls wherever there is a tele- 
phone in the country. 

Now, maybe that explanation I've simplified it too much, but 
then I come back and I read this bill. And it says that nondiscrim- 
inatory rates will be based upon reasonably identified costs of pro- 
viding the services. 

If those 1,000 people in that village are going to have costs based 
upon identifiable costs of providing services, they are going to be 
billed on the $70,000 plus the $10,000 a year. Today, those rates 
are not anywhere near compensatory to costs. 

Now, how can you provide services, say, in rural areas like mine 
and throughout the country, under this concept of nondiscrim- 
inatory rates based upon reasonably identified costs, when you are 
really talking about competitive situations that were described to 



185 

me, and that is that you want to be able to deliver your service on 
a universal basis? 

Today you would absorb those costs in your system. And our peo- 
ple would get service based upon what is a reasonably expected 
cost of service, rather than one based upon reasonably identifiable 
costs. 

Am I wrong to pick out those three words and say that means 
bad news for rural States? 

Mr. Allen. Well, I am not sure. I do think. Senator, that you 
ought to be wary about any legislation that puts all of the power 
or authority at the FCC level or in any central point in this coun- 
try. 

It is not my understanding — ^maybe I have misread the legisla- 
tion — that the elimination of State regulatory bodies is inevitable, 
if this legislation is passed. I do think you ought to be concerned 
about that. 

Our offerings for a long-distance service are generally uniform 
around the country, irrespective of the particular location in which 
we operate, whether it is Alaska or in a high metropolitan area like 
New York, so that our — one of the advantages we offer our cus- 
tomers is that they know that the rate will be comparably the same 
any place thev go. 

So, we will certainly not enter any market, as an institution, 
hoping to lose money, but we would have to go into Alaska or any 
other market on the basis of the relevant costs and what our na- 
tionwide rates structure would produce in the way of profits and 
margins. 

And it is not likely that the early entry would cause us to realize 
any profits for a time, but it is a longer term investment in the 
marketplace that would be of interest to us. But I do not know 
what specific cost numbers you are dealing with and, therefore, I 
cannot comment. 

Senator Stevens. I do not mean to be unfair about that. And I 
am not going to prolong it. You know, the great problem I have is 
having seen the progress we have made in our State and still wit- 
ness the terrible Third World poverty in areas of our State, I know 
that we cannot have service based upon identifiable costs. 

Now, we are either goin^ to have service and be part of the net- 
work — the telecommunications network of the United States or we 
are going to go back to the point where we are going to have to 
have some Federal system serve us. 

When we do that, then, and you have mothers and fathers in 
Florida that are trying to call their sons or daughters that are sta- 
tioned at some far oflr point in my State, I think you are going to 
bear the burden in the long run. You do hold yourself out to be able 
to deliver those calls wherever an individual is. 

Now, I do not know whether the cellular system is going to pro- 
vide the breakthrough or not, but I just tell you, I have real res- 
ervations, based upon the specifics of this bill that deal with, on 
one hand, the pledge of universal service; on the other hand, a con- 
cept of giving the FCC the authority to allocate the responsibility 
for regulation based upon whether or not the State agency provides 
a system of nondiscriminatory rates based upon reasonably identi- 
fiable costs. I would urge you to study that. 



186 

And in my opinion, unless there is some way that the industry 
can explain to those of us from rural States what happens to those 
people thousands of miles from any other — 1,000 miles from a met- 
ropolitan area, what happens to them in terms of basic cost of tele- 
communications services, then, I think, this bill is going to have to 
wait for a long time in being enacted, as far as I am concerned. 

Mr. Weiss. Senator, if I may comment just a moment. 

Senator Stevens. Yes, sir. I apologize to all of you gentlemen for 
passing you by, but I think Mr, Allen is my current new found pen 
pal. [Laughter.] 

Yes, sir, Mr. Weiss. 

Mr. Weiss. I agree with you 

Mr. Allen. I was hoping you played golf [Laughter.] 

Mr. Weiss. I agree with you that the regulatory process must be 
reformed. The historic investment-based regulation absolutely will 
not deal with the fast moving marketplace or the rural areas or 
whatever it is you are talking about in this industry. And that is 
my point. 

We argue to move to price regulation, because that keeps the 
customer clearly in focus and does have an interest in what they 
get for what they spend, but rate of return regulation or invest- 
ment-based regulation gets so detailed and tedious that there is not 
a regulatory body in the world today that can keep up with this 
industry and regulate it properly. 

So, one of the precepts of this bill, I think, has to be new forms 
of regulation to deal with the industry as it is moving forward. i 

The final point, to change the subject a minute, your comment ; 
about McCaw and the city of Florida and service that they pro- ! 
vide — toll-free calling throughout the State. i 

One of the points I would make in spades here is if, in fact, 
AT&T acquires McCaw it is really mandatory that all of the other 
cellular providers be able to offer similar service offerings, which 
means, at the minimum, intercity permission ought to be granted 
to the cellular providers, because when those cellular systems are 
run by regional holding companies, they cannot do what McCaw 
does. And they are clearly disadvantaged in the marketplace. 

Senator Stevens. Well, I understand the difference between the 
investment based concepts and the cost based concepts that we are 
coming into now. 

And that is one of the great feuds we have, however, in the rural 
areas, because I think that we are at the tentacles of this system 
as it tumbles. And we do not want to be left out. I want my people 
to come into the 21st century with everyone else. 

And this bill indicates to me that we will stay back in the invest- 
ment base, while everyone else is going to the cost base system, un- 
less we are part of the national. And we will have to work that one 
out. 

But thank you very much, Mr. Chairman. Thank you, gentlemen. 

Senator Inouye. Senator Lott. 

Senator Lott. Thank you, Mr. Chairman. Now, in retrospect, I 
think I should have perhaps made my statement at the beginning 
of the hearing, but now I am going to acknowledge the good work 
that you and the Senator from Missouri have done on this. 



187 

You certainly have stirred up a lot of interest. And I think that 
it is very healthy. And I hope some good results will come out of 
these hearings in what finally is devised as legislation. 

I want to thank the panel. And I apologize for the length of time 
you have had to wait to get through these questions. And I just 
really want to get into one area, since time has just completely got- 
ten away fi^om us. 

I think, Mr. Allen, that you should be conCTatulated for what you 
have — are trying to accomplish there with McCaw. It is certainly 
an outstanding company, but there has been, again, a lot of inter- 
est and, I guess, some questions about how that is going to work, 
trying to understand the short- and the long-term implications of 
that merger and what it will mean both in local and long-distance 
competition. So, toward that end, I have just got two or three ques- 
tions I would like to ask at this time. 

Over the next few years, could AT&T use McCaw and wireless 
technology to bypass the local exchange? And if not, why not? 
Could that not be one of the results? 

Mr. Allen. Well, there is actually no incentive for us to do that. 
If you remember the chart I put up there, in order to build a totally 
wireless connection between wireless callers and anybody else, 
would cause us to commit untold capital dollars, which we have no 
incentive to do. 

That is to say, less than 1 percent of long-distance calls today are 
placed by cellular users. Now, hopefully, that will increase over 
time, but it is less than 1 percent today. 

And so we have no financial incentive or other incentive to build 
something around the local exchange that now connects those cus- 
tomers to the long-distance network, either at AT&T or one of our 
competitors. 

So, it is not our intention. It does not make strategic or financial 
sense. And we believe that the local exchange carriers can and 
should be the best providers of access. They nave the embedded 
plant. 

They have — in a competitive environment, they certainly would 
have higher incentive to be the most efficient, the best supplier of 
access. And why would we want to commit our capital to building 
something around them, when it is unnecessary, when we have so 
many other capital needs? 

Senator Lott. So, your answer is you could do it, but at this 
time, the financial incentive to do it would not be there; is that 
right? 

Mr. Allen. Technically, it is possible, because I asked the presi- 
dent of the Bell Laboratories that last week, because this has be- 
come such an issue. And I had never asked the question before, 
which, obviously, means it is not a strategy of AT&Ts. 

And he said, "Yes. Technically, anything is possible." But it does 
not make any sense. 

Senator Lott. As far as the number of people using those cel- 
lular systems for long-distance calls, I assume that as they are 
used in greater numbers and, you know, we are such a mobile soci- 
ety. I would say one-half the calls I make are long distance. 

Mr. Allen. Well, I hope they are AT&T calls. And I thank you 
for that, but you do not represent the average user of cellular serv- 



70-334 0-94-7 



188 

ice, which tends to be in the local exchange or in the cellular call- 
ing area. 

Mr. Weiss. I would just, again, call your attention to the excep- 
tions, which will become the rule before too long. If you look at the 
city of— Florida service for McCaw, it is a network lashed up to 
provide statewide free calling within the cellular system. 

And so, quickly, at every turn, we have passed what currently 
seem to be normal conditions and technology will just change the 
world for us. 

Mr. Allen. I do believe that Bell-South, who is the other cellular 
provider there, has the same option to provide the same service. 

Senator LOTT. Well, the followup question to this, the Bell com- 
panies now have cellular or wireless subsidiaries, and under — but 
under the current MFT restrictions, they are prohibited from pro- 
viding the same range of service, I believe, that AT&T and McCaw 
could provide a customer, and that is both local and long-distance 
service. 

Does that not cause a possible disparity between the two? 

Mr. aIlen. Well, they have the same option to provide local call- 
ing that McCaw now has and that, presumably, we would have if 
this deal is consummated, through cellular calls for local purposes. 
So there is no disparity there. 

The disparity, perhaps, exists with respect to the restrictions of 
the MFJ that you talk about on connecting long-distance calls out- 
side of the particular serving RBOC territory. 

And as I said, that is less than 1 percent of the calls today, but 
whether it was 1 or 50 percent, the fundamental restrictions that 
were imposed by — ^in the MFJ were based on the fact that until 
and as long as the monopoly bottleneck exists, which it does here 
and which I have demonstrated we have to use even as a cellular 
provider, then there still remains that incentive and tendency, if 
you will, although perhaps not now intended, to subsidize, to cross- 
subsidize, to favor your own supplier, et cetera. 

So, competition, which this bill calls for in the local exchange, 
eliminates all of those problems. And then the market is open to 
everybody on an equal basis. 

Senator Lott. Is this a disparity that makes any difference, Mr. 
Weiss? 

Mr. Weiss. Well, Senator, I simply disagree with Mr. Allen on 
the premise he has laid out. And I think my facts are correct. A 
regional company is required to provide equal access opportunity 
for his customers in both local exchange and cellular. 

And what that means is we cannot lash up with an intercity car- 
rier to provide a phone network that goes beyond any one of our 
tightly confined LATA's. You just cannot do it, by law. 

Senator Lott. Just one last question, Mr. Allen, because we are 
out of time here. Could a consumer subscribing to McCaw select a 
long-distance carrier other than AT&T? 

Mr. Allen. They can in some territories. And it is our intention, 
if the merger consummates, to provide equal access to all of our 
customers. 

They do today in several markets, particularly where they are 
joint partners with Pacific in San Francisco and with Bell-South in 
Los Angeles and Houston. And it would be our intent to give all 



189 

of our cellular subscribers equal access to any interexchange car- 
rier they wish. 

Senator Lott. Well, this is certainly an interesting development. 
And I am sure we are going to be watching it very closely as it goes 
forward. 

Thank you, Mr. Chairman. 

Senator INOUYE. OK Senator Mathews. 

Senator Mathews. Thank you, Mr, Chairman. 

Mr. Weiss, we indicated a few moments ago that perhaps there 
was not an area of computation and of rates in some areas that 
both you and Mr. Allen had jurisdiction over, but there seems to 
be a pretty good healthy computation for the service in those areas. 

It seems to me that we are getting down to the point of what 
happens in a LATA, the things that you can do in one, the things 
that Mr. Allen can do and the things that neither of you can do 
or what. 

Would you share with me as a newcomer on this, you know, what 
is a LATA? What do you do in it? What does Mr. Allen do in it? 
What does MCI or somebody else do in it? 

Mr. Weiss. I will try to keep it as brief and simple as I can. At 
the time of divestiture, the Department of Justice and the AT&T 
Co. were seeking a means of separating the local exchange from 
the intercity business. Intercity being the toll call between major 
cities or major areas of the country. 

The term, LATA — or local access and transport area — is a de- 
fined area in which the local exchange can operate fully. It does not 
preclude competition from entering it, but that is the area in which 
the local exchange company can operate fully. 

Now, as that was worked out across the country, there are dra- 
matic differences in the way LATA's were devised. For example, 
Wisconsin has four LATA's. The State has four LATA's— northeast, 
south, southeast, and so forth. 

In Illinois there are more than a dozen LATA's, defined more 
around cities or communities — communities of interest. And any 
traffic between those, any calling between those, then goes to one 
of the MCI's, AT&T's, Sprints, or other carriers that provide that 
service. 

So, it was simply a way of defining and dividing the industry on 
divestiture. 

Senator Mathews. Could you — do you have the capability or do 
the local companies have the capability of crossing lines and legis- 
lation restricts you or is it a matter that you are just set up within 
the LATA to serve that area? 

Mr. Weiss. No. We used to, but then with divestiture, we sepa- 
rated those facilities, so that the things that went across that 
boundary went to AT&T, in effect, on divestiture. And we retained 
the facilities in the local exchange or the LATA, if you will. 

Now, could we do it again? Yes. In nearby arrangements, where, 
for example, the city of Rockford, IL, might want to reach up into 
southern Wisconsin. And we might be the full service provider, if 
we had full freedom to do that. Yes. We could do that relatively 
easily. 



190 

Could we become a competitor on a national basis? Absolutely 
not. We do not have the investment capability to even think about 
that. 

So, our approach is to try to become full service providers to cus- 
tomers by being able to be their account manager, if you will, and 
work with AT&T or MCI or whoever the customer chooses to set 
up the total service. 

Today we cannot even do that. We cannot resell. We cannot 
touch that. We cannot manage a customer's business or his inter- 
city component. We are totally prohibited from any part of that. 

Senator Mathews. I have one other question. And then I want 
to ask Mr. Allen to respond to this, basically the same one. To what 
extent does cellular service enter into this equation of within a 
LATA and outside a LATA? Are you — can you offer cellular service 
in your LATA's? 

Mr. Weiss. Yes. We can offer cellular service within the LATA, 
but we are restricted to the same intercity prohibitions that we are 
for local exchange service. 

Senator Mathews. In Florida, if you are — does a Florida — cel- 
lular programs, other than McCaw, now, can they offer statewide 
service just as McCaw? 

Mr. Weiss. Not on the basis that McCaw is doing it. That is my 
understanding. 

Senator Mathews. All right. Mr. Allen, on the news last week, 
I guess it was, a McCaw and AT&T merger, I think, sent some 
Shockwaves through the country, but also sent a lot of hope 
through the country, too, because of the things that are developing. 

I am thinking we are probably at a point where the technology 
is way ahead of where we are, in terms of allowing that technology 
to serve the people. 

And I am hoping that we are not behind, as a result of the ques- 
tion who is going to serve these people. And I hope we all have the 
same hope in mind and the same goals in mind on that. 

In terms of talking about an acquisition of McCaw, you seemed 
to say or suggest that it is sort of a routine-type acquisition. 

I mean, it is a natural business step in a progression of one step 
up the line. What other acquisitions has AT&T made since the 
breakup? What are we moving toward? What are you moving to- 
ward? 

Mr. Allen. Well, regardless of what I may have said, a $12.8 bil- 
lion acquisition is not routine, even in a company the size of AT&T. 
And the other major acquisition that we made a few years ago was 
the NCR Corp., which has now become the computer division of 
AT&T. 

Except for an interest that we have in new technologies and new 
companies that bring different ideas on the scene — ^mostly Silicone 
Valley kinds of interests — we have no further plans in terms of 
major acquisitions. 

We have stomached — if we complete this one successfully, we 
have done about all that I think we are capable of doing. And, in 
fact, the division of our business does not suggest that we need to 
move into any other areas, as long as we can execute on the strat- 
egy. 



191 

Senator Mathews. Have you made any — do you own any cable 
companies or is this — or is that a next step which would tie all of 
these operations together? 

Mr. Allen. No. We do not own cable companies and have no in- 
terest in owning cable companies. We would like to be a provider 
of technology to both the telephone companies and the cable compa- 
nies, as we see both of those industries change, and hopefully seek 
a competitive environment stimulated there between the two of 
them in their own markets. 

And we believe we have the technology which can enable both 
the telephone companies and the cable companies to realize their 
vision. And there could be other suppliers of that, obviously, but 
our interest is in partnerships, as opposed to ownership. 

Senator Mathews. Just one other. Would you care to comment 
on any of the questions that I asked Mr. Weiss about service within 
a LATA area? 

Mr. Allen. No. No. Thank you. 

Senator Mathews. Thank you, Mr. Chairman. 

Senator Inouye. Thank you. Senator Breaux. 

Senator Breaux. Thank you, Mr. Chairman. And I thank all of 
the panel members for being here all morning and providing your 
testimony. 

Let me continue with my general theme or premise, and that is, 
that all communication companies that come to Congress, basically, 
come to the theme of let me in your business, but stay out of my 
business. 

And I hear that from just about everybody. I mean, some want 
to do manufacturing. Some want to do local service. Some want to 
do long-distance service. Some of them want to be in the cable busi- 
ness. Some want to be in the broadcasting business, but it does not 
leave anybody back in their business. 

Now, Mr. Allen, you and Mr. Weiss are incredibly successful and 
outstanding businessmen, captains of industry, supporters of the 
free enterprise system. 

What is wrong with the Congress just saying, "We are out of 
here, folks. If you can do, go do it. If you want to manufacture, Mr. 
Weiss, manufacture. Mr. Allen, if you want to do long-distance 
service, go to it. If you want to provide local service, if you can do 
it better than Mr. Weiss' companies, go to it." 

I mean, we are trying to determine what competition is here. 
Should not the free market determine what competition is? What's 
wrong with us just getting out here? Mr. Allen, do you buy that? 

Mr. Allen. I think if we could assure the American public that 
competition — ^there were no barriers to competition in all the mar- 
kets you have described and, in fact, customers had choice and the 
true competitive environment existed 

Senator Breaux. Well, would that not happen if Congress got out 
of it? Would that not happen if Congress got out of it? I mean, it 
is not happening now. 

I mean, your argument is that you do not have competition in 
the local systems, because we have got a monopoly, which was cre- 
ated by the Government. Suppose we did not have that anymore. 
Would not the competition exist? 



192 

Mr. Allen, Well, I would hope it would, but. Senator, I came 
from that environment. I was never malintended. I never intended 
to cross-subsidize. 

I never intended to disadvantage someone who might be a com- 
petitor against my business, but in retrospect, the whole Bell Sys- 
tem did so. 

That was the basis on which that business was broken apart, be- 
cause as competition entered parts of the business, we could not co- 
exist with competitive businesses and monopoly businesses, be- 
cause the temptation is there for mischief 

I was a part of it. I did not do it to hurt anybody, but I know 
that the collective efforts of all of us — ^well intended — set back the 
development of competition in this industry by a number of years. 

We all did a good job in building a telecommunications system 
for this country. It is the best in the world. The old system worked. 
It is time for a new one. 

Competition has been demonstrated to work. Let us get competi- 
tion in every marketplace, except those areas where we need be 
concerned — in the rural areas or areas where competition may not 
work. I am willing to concede that. 

And then let us all go at each other. And we do not need this 
committee. We do not need the FCC. We do not need anybody. 

Mr. Weiss. I already voted in favor of this proposal, Senator, but 
we cannot even get started. I could ask Mr. Allen, if he acquires 
McCaw, would he not at least agree that we ought to have intercity 
or long-distance parity for cellular providers? 

Senator Breaux. You all have been very nice to each other. I 
mean, you are trying to bury each other economically. I mean, that 
is what it is all about. [Laughter.] 

Mr. Weiss. Well, would it not be reasonable 

Senator Breaux. That's right. These gentleman are just being 
very nice. When they leave the room, vou are trying to bury each 
other economically. That is what it is all about. And I am glad. 

Mr. Weiss. Would it not at least be reasonable for parity to exist 
in those parts of the industry which are similar, like cellular, if 
they acquire McCaw? 

Senator Breaux. Mr. Allen, why did you all buy McCaw? 

Mr. Allen. Well, we invented the technology. It seems natural 
to our business. It is a growing business. And it is something that 
AT&T needs to do. It needs to grow. It is not growing in its core 
business. It is a relatively new and developing technology. 

Senator Breaux. What does it allow you to do that you cannot 
do now? 

Mr. Allen. It allows us to be in a business that is growing, 
changing; one that is dynamic; one that we are not currently in, 
except as a provider of 

Senator Breaux. Local service? 

Mr. Allen. No. I do not know how many times I have to say it. 
I do not want to be in the local service business. 

Senator Breaux. Is AT&T experimenting with facilities of our 
using cellular or their personal communications system to bypass 
the local exchanges? 

Mr. Allen. To my knowledge, the answer to that is "No." We 
have no intent to bypass, as long as the access providers give us 



193 

good service, cost base pricing and something — why would we want 
to rebuild an infrastructure, when we have got so many other cap- 
ital needs? 

Senator Breaux. Has AT&T not experimented with the question 
of bypassing the local exchange by the use of 

Mr. Allen, I am sure people in our organization have looked at 
every possibility. Every time we have even thought about bypass 
as any conscious strategy, we have rejected it on the basis that we 
have seven RBOC's out there and a whole lot of other local ex- 
change companies who ought to be in the best position of anybody 
in the world to provide the best access in the world. Why do we 
want to bypass? 

Senator Breaux. Mr. Weiss, why 

Mr. Allen. Occasionally — ^may I just add one thing? 

Senator Breaux. Sure. 

Mr, Allen. Occasionally, some customer will come to us, like 
Sears, he talks about, and say, "Look, I am going to put my service 
out for bid to a long-distance carrier. Would you like to bid on it?" 

Well, my inclination is not to turn away, because I have a loyalty 
to Bill Weiss, who is an access provider. 

Senator Breaux. Mr. Weiss, why are you worried about Mr. 
Allen getting into the long-distance service? He says that when he 
goes to the local service, that it has to come through you anyway, 
that 99 percent of all of his use of local service, that you are going 
to benefit fi^om it, because he has to buy it fi'om you? 

Mr. Weiss. Well, that simply denies the movement of technolo^. 
Senator. I mean, I tried to describe in my opening comments the 
fact that the local exchange is the multifaceted operation. 

And in many elements of that, AT&T is a fairly significant play- 
er. So, I mean, I think — and I also tried to say that if you get down 
to simply trying to define this on the basis of which market AT&T 
wants to enter or does not want to enter, and therefore, defining 
only those that they do not want to enter as monopolistic, denies 
the reasonableness of this whole scheme. 

The final point, simply, is this: I have got to take Mr. Allen's 
word. He has the law on his side. It seems to me this just ought 
to be changed. That is all. 

Senator Breaux. Mr. Allen, Mr. Weiss, in his testimony, says 
that your company's long-distance carriers are already in their 
business. 

He says that long-distance carriers are offering local services in 
competition with the regional companies and local exchange compa- 
nies. And they have been quite successful. 

In the five states that Ameritech serves, long-distance carriers 
now provide 50 percent of the local toll service provided to larger 
business companies. 

These carriers have also successfully targeted 800 toll-fi-ee serv- 
ices. In 4 years, we have lost 75 percent of our local 800 business. 

I mean, what he is saying is that you are, collectively, in his 
business, but he cannot get in your business. 

Mr. Allen. Well, Senator, we can dispute the relevance of the 
small segments of the market where Sears is not in the world 
where we, in fact, compete. 



194 

Senator Breaux. You said it does not happen. It is not that 
much. 

Mr. Allen. Well, it is not relevant to the question of whether 
there is competition existing in the larger marketplace. 

It is of concern to Mr. Weiss and should be, but if one complains 
about losing 75 percent of the 800 service in a LATA, I think one 
has to go examine its offering in the marketplace with respect to 
price and service and features, not complain about whether some- 
body else is in the market or not. 

If the telephone companies who have owned the LATA's for all 
of their existence cannot be the best service in those LATA's on any 
basis, having them as their captive customers, if you will, then I 
do not know who can be. It's a fair marketplace with some excep- 
tions, the possibility to walk away from this and let the market- 
place decide, because there are forces who will eventually decide 
these issues in favor of almost all consumers, and we need to worry 
about those who are on the fringes. 

Mr. Weiss. And I agree with that. 

Thank you, Mr. Chairman. 

Senator INOUYE. Thank you. 

Senator Packwood. 

Senator Packwood. Mr. Kapor, in your draft statement, under a 
Jeffersonian vision of national information — this is not your state- 
ment today — ^but your draft statement we had, in your first para- 
graph you indicate what the benefits are that you want to achieve. 

And then you say, "To achieve these and other benefits, the in- 
frastructure must be open, accessible, and affordable to all citizens 
throughout the country." 

In your statement today you say, "To achieve these and other 
benefits we know that we need more capacity than is currently 
available in today's analog voice telephone system." 

I cannot find this open, accessible, and affordable an)rplace else. 
Have you changed your policy? 

Mr. Kapor. No, not at all. In the interest of keeping my oral tes- 
timony to a reasonable length, we simply shortened the fiill text of 
remarks. But I certainly stand firm on open, accessible, and afford- 
able. 

Senator Packwood. Then on page 4 of your testimony today, you 
use the aigument about printing, and that being, perhaps, the 
most open, affordable, and accessible, and it is easy to get into, and 
easy to access. But to an average citizen, how is a DNA tax notice 
affordable at a couple of thousand bucks a year? 

Mr. Kapor. I am not familiar with the particular — is this an on- 
line service that 

Senator Packwood. It used to be a print service. I mean, you can 
get them electronically now. But these are expensive, usually over- 
night, daily services of what is going on in some industries or Con- 
gress, and they are very expensive, comparatively speaking. But 
how are those affordable to an average citizen? 

Mr. Kapor. Well, there is an interesting dynamic that happens 
that we have seen with expensive information services, in the con- 
text of the Internet. 



195 

The same service which formerly might have been $100 an hour 
to access is made available commercially on the Internet for $5 to 
$10 an hour, profitably. How can that be possible? 

Well, it turns out that when we have a big infrastructure that 
is capable of reaching a lot of people you do not have to charge the 
high prices. To the extent that the infrastructure underlying the 
service is limited, the providers are going to have to charge more. 

Senator Packwood. Well, let me give you another one then. 
"Open platform services," the infrastructure which you are talking 
about, "will enable children at home to tie into their school library 
to do their homework, or make it possible for a parent who makes 
a video of the local elementary school soccer game to share it with 
parents and students throughout the community." 

What if the parent cannot afford the video camera? 

Mr. Kapor. Well, the interesting things to look at are the cost 
curves for all of this technology. For instance, the cost of the equip- 
ment that you would need to receive this open platform service 
would be extremely small, especially at the point when it can be 
integrated into every single television set, just as we have seen 
captioned decoders being integrated in so that every TV will have 
that capability. 

Receiving information, interactive multimedia, it is not going to 
be a cost barrier, as long as you assume that people will be able 
to buy TVs. The last time I heard, more people had TVs than ei- 
ther telephones or indoor plumbing. 

Senator Packwood. OK. 

Mr. Kapor. But on the other side 

Senator Packwood. Well, wait. Wait. This is what I want to get 
to. In other words, affordable does not mean that the Government 
has to provide it. If people can afford to buy a television, that is 
adequate. 

Mr. Kapor. Absolutely. 

Senator Packwood. OK 

Mr. Kapor. The whole idea is to ramp up the technology by mak- 
ing it available on a mass scale. That is what is going to drive 
down costs. 

Why do personal computers come down in cost from $5,000 to 
$500? By the way, the $500 base machine you buy today is about 
50 times more powerful than the one you paid $5,000 for 15 years 
ago. 

Senator Packwood. I just want to make sure I understand the 
goals of your organization. You are not saying at the start that we 
nave to make new technology affordable to everybody in the coun- 
try as it becomes available. 

And it is initially expensive. I realize that it will come down, but 
we do not have to make it affordable to eveiybody. 

Mr. Kapor. Absolutely. When we say affordable, we think that 
the economics of deploying open platforms will cost — that is the 
single thing that will cause the costs of the technology to come 
down in the most rapid fashion. 

We do believe that at the margin there are still going to be some 
class of users out there who are going to require some sort of sub- 
sidy, but we really think that is the marginal case, just as it is the 
marginal case today. 



196 

Senator Packwood. And there will always be some class of serv- 
ice that is quite expensive, and only a few people can — there are 
only a few people who want it, quite frginkly, 

Mr. Kapor. That is right. If the market is allowed to operate, I 
mean, it will sort itself out, and clearly there are going to be some 
very high-end services. 

Senator Packwood. My hunch is that the average citizen does 
not want DNA tax notes. I seldom want it. 

Mr. Kapor. You may also find, though, that there are sources of 
information today that are very expensive, that are assumed not to 
be of interest, but, in fact, turn out to be of interest. And there is 
a barrier, in terms of an artificial scarcity that was created by its 
price or its technological unavailability. 

Senator Packwood. Let me ask you this question, and then I 
want to go to the two telephone men. In terms of cable television, 
should there be any charee for premium channels at all, or should 
that be available to everybody? 

Mr. Kapor. The distinction that we make in the first instance is 
between the entire range of kinds of services that are offered today 
on cable — and that includes basic and premium, and so on — which 
are one-way, noninteractive, and where the content is controlled 
and selected by the cable provider. 

We contrast with that with open platform services which will be 
interactive, two-way switched, and where the content will be deter- 
mined by the users. What we are saying is 

Senator Packwood. No. No. You are not following my question. 

Mr. Kapor. OK. 

Senator Packwood. I understand there is one-way versus two- 
way. Wliat I am saying is: Should that benefit be free to the user, 
whether as one-way or two-way, or are there some things for which 
you will be allowed to charge which some people cannot afford? I 
do not care if it is two-way. It is input, rather than receiving. 

Mr. Kapor. I do not have an answer to that question, and I am 
not going to tell you that I do. But I would say that we would have 
to look at specific instances, not formulate the general rule. 

We have to decide whether something like HBO is important 
enough to interfere with the working of the market, and demand 
that it be offered in a certain way. That is outside my area of ex- 
pertise, but I agree that it is a very legitimate question. 

Mr. Weiss. Senator, if you would get back to the ISDN 
service 

Senator Packwood. The basic what? 

Mr. Weiss. The basic ISDN service, the rates for that service in 
our five States range from $20 to roughly $48. The differences at 
the high end are bscause of a good deal of usage added into the 
rate, where at the low end it is basic service. Now, that is very 
comparable to cable television rates in most States right now. 

So, if you are talking about, "Is it affordable?" broadly, I think 
so. 

And we have had no investment help in making that happen. 

Senator Packwood. Eventually, I am going to get back to the old 
argument of subsidy. I go back far enough on this committee that 
I can remember the advertisements that Mr. DeButts used to cut 



197 

on television, and Charlie Brown. I have not seen Mr. Allen a lot 
on television. 

Mr. Allen. You will not see me enticed into that arena. 

Senator Packwood. OK. [Laughter.] 

I would pay to see you. There might be a small base of support. 

This statement that Senator Breaux read of yours, Mr. Weiss, 
"Telecommunication providers, other thsm Bell companies, already 
are free to compete outside their traditional businesses. Long-dis- 
tance carriers are offering local services in competition with the re- 
gional companies and other local exchange companies, and they 
nave been quite successful." 

Who are the long-distance carriers? Mr. Allen says he is not 
doing it. Who are the long-distance — or is Mr. Allen doing it? 

Mr. Weiss. Yes. He is. And so 

Senator Packwood. OK. Mr. Allen, are you doing it? 

Mr. Weiss. So is everybody. 

Senator Pack\/ood. All right. Are you doing it, Mr. Allen? 

Mr. Allen. Are you talking — are you back to Sears? [Laughter.] 

Senator Packwood. I am talking about long-distance carriers of- 
fering local service in competition with regional companies. 

Mr. Allen. No. No. We do not offer local service anyplace in com- 
petition with local 

Senator Packwood. Now, Mr. Weiss, you said they do. 

Mr. Weiss. Yes. They do. [Laughter.] 

Senator Packwood. Can you- 

Mr. Allen. We are prohibited from owning an RBOC. 

Senator Packwood. Well, Mr. Weiss, can you respond then? 

Mr. Weiss. Mr. Allen very tightly defines a local exchange in his 
response to that part where they are not involved. 

But I have tried to lay out in my oral comments here this morn- 
ing that there are many elements at the local exchange. And they 
participate in a number of those markets, as do others. And that 
is absolutely the way it ought to be. 

Senator Packwood. What is Mr. Allen, in your mind, defining 
very tightly so that it excludes the definition of local competition 
when he says he is not in it? 

Mr. Weiss. He has to define local residential telephone service as 
the basis of choice. 

Senator Packwood. So, he is saying, in your judgment, "I am not 
in the local residential telephone service; therefore, I am not in- 
volved in local" 

Mr. Weiss. Essentially. 

Senator Packwood. Is that what you are saying, Mr. Allen? 

Mr. Allen. I am not in the local residential telephone service 
business. I am not in the local business telephone service. We pro- 
vide long-distance service to customers who are both residential- 
and business-oriented. 

And in a few instances, we do direct connect with large busi- 
nesses who want to aggregate their usage, and bypass the local ex- 
change, which may be 

Senator Packwood. For purposes of long-distance calls. 

Mr. Allen. For purposes of long-distance calls, and presumably 
for efficiency reasons, and are managed under their own networks, 
which is not something that we 



198 

Mr. Weiss. They provide PBX systems in many cases. 

Senator Packwood. They provide what? 

Mr. Weiss. They provide PBX systems, if that is 

Senator Packwood. You mean equipment. 

Mr. Weiss. Yes. And they provide key systems 

Senator Packwood. Well, I do not mean equipment. I am still 
confused by local competition, as to what you are saying and what 
Mr. Allen just said. 

Mr. Weiss. I am saying of all the revenue streams available to 
the local exchange companies, to make it a vital company, and to 
permit it to move forward with the investments that this commit- 
tee is very concerned about, Mr. Allen is in many of those elements 
of my business. 

Senator Packwood. What are they? 

Mr. Weiss. A large business. 

Senator Packwood. A large business making local phone calls. 

Mr. Weiss. The equipment business. 

Senator Packwood. No. No. No. Let us go one at a time. He is 
a large business making local phone calls. He is in that business. 

Mr. Weiss. Yes. 

Senator Packwood. Mr. Allen, are you in that business 

Mr. Allen. Well, I do not imderstand. I do not know what his 
definition of local is. It is possible, I suppose, for a business cus- 
tomer to make long-distance calls that comes back into his phone 
exchange. It is not a very efficient way of doing it. 

Senator Packwood. No. What I essentially mean — although, I 
understand you are not the Sears provider; somebody else is, fi-om 
Chicago, 

Mr. Allen. Even if we were. 

Senator Packwood. All right. Even if you were. I think what he 
means is that the local Sears employee calls the garage to see if 
their car is ready. He got it repaired, and somehow you are han- 
dling that call. 

Is that what vou mean, Mr. Weiss? 

Mr. Weiss. If we sell the PBX, and the call is made 

Senator Packwood. No. I do not mean the equipment. I under- 
stand the equipment part of it. 

Mr. Weiss. These are major systems that are just as large as our 
local exchange switches. When you take the First Chicago Co. — and 
since Mr. Allen lost Sears, why, I will talk about First Chicago. 

The issue here is that that is a multi structured, major business 
account, provided in large measure by AT&T, for the equipment 
and the service within that system. 

Senator Packwood. OK, 

Mr. Weiss. And those calls are occurring within the local ex- 
change just the same as two calls between business systems. But 
by definition, AT&T would very much like to have those excluded. 
Now, they are part of my revenue structure, if I can be competitive 
for them. 

Senator Packwood. I still do not understand. I understand 
AT&T provides equipment. And what does Allied — to use whatever 
example you said. 

Mr. Weiss. The First Chicago Corp. 



199 

Senator Packwood. All right. The First Chicago Corp. AT&T 
provides a lot of their equipment, maybe all of their equipment, for 
all I know. 

Now, the secretary at First Chicago is going to call her husband. 
She picks up the phone. Does this completely bypass your network? 
And this is a local call, not only put on AT&Ts equipment, but it 
goes over lines that are not yours to the secretary's home in Chi- 
cago. 

Mr. Weiss. Not normally, if he is not located in the same general 
business configuration that she is. 

Senator Packwood. In other words, if he is in the bank 

Mr. Weiss. If he is in the bank, she would be calling totally out- 
side of our service. 

Senator Packwood. I cannot get the answer. 

Mr. Weiss. Because you see 

Senator Packwood. Senator Gorton says the answer is 
intrabusiness calls. He says Boeing-Everett to Boeing-Seattle might 
be handled by somebody other than the local exchange; is that 
right? 

Senator Gorton. I think they are the same. That is right. 

Senator Packwood. So, that is what you mean by local competi- 
tion, that they are handling on their own lines, or not with your 
lines, or do they interconnect 

Mr. Weiss. Either way. 

Senator Packwood [continuing]. With some intermediary car- 
rier? 

Mr. Weiss. Either way. If the First Chicago Corp. has a series 
of business locations around town, they may connect those locations 
with somebody that has nothing to do with us, like Metropolitan 
Fiber Systems, or Teleport, that provides connecting links and 
dedicated channels between those. So, it is a totally internal sys- 
tem, in various locations in the city, that bypasses the local ex- 
change totally. 

Senator Packwood. Basically, it is an in-house communications 
system for the company. 

Mr. Weiss. Yes. But what is the difference between that and any 
other call that is being made within the local exchange? 

Senator Packwood. Sure. You may have a point. I am just trying 
to get down to how the physics of this works. Now, the company 
is all hooked up intracompany. To the extent that you make a call 
on the company phone that is outside the company, it goes to your 
home, and you normally carry that 

Mr. Allen. Yes. 

Senator Packwood. OK So, the competition is not what we 
would normally call, or what the average citizen would think of as 
local competition, because we do not think of it as intrabusiness 
initially. We think of it as residential. 

Mr. Weiss. That is right. 

Senator Packwood. And if one business were to use this 
intraphone system to call another business, you would handle that 
call. 

Mr. Weiss. We probably would. We would not necessarily, but we 
probably would if it were within Chicago. 



200 

Senator Packwood. OK. Now, what would happen if we were to 
simply say to the two of you, and Senator Breaux was pursuing 
this, *We would preempt the States' competition, and why do not 
the two of you iust go at it for long-distance and local?" 

What would happen? 

Mr. Weiss. There would be a readjustment of the industry. In 
other words, my business would change, and so would Mr. Allen's, 
but in ways that would not — for example, if I did not have a na- 
tionwide intercity network, as he does, I cannot provide that serv- 
ice. 

So, what I would do with this freedom is work with customers, 
so that I would become their agent to negotiate and handle all of 
the services they want, even though some of it might be provided 
by AT&T, or some of it might be provided by MCI or others. I can- 
not do that today. So, I really am very limited when I even get in 
the negotiations. 

Senator Packwood. I understand that you cannot do it today. I 
am wondering what would happen if both of you could go at each 
other in your respective businesses, let us say within a dfeadline of 
January 1. 1995, and at that stage we would preempt State regula- 
tions and local regulations, and we say to you and Mr. Allen, 'Get 
ready." 

Now, what would happen? 

Mr. Weiss. What would happen, in my opinion, is that all ele- 
ments of the industry would grow faster than they are today. To 
Mr. Allen's testimony, that is what competition generally does 

Senator Packwood. Mr. Allen, what do you think would happen? 

Mr. Weiss [continuing]. Expand the marketplace. 

Senator Packwood. You are given a reasonable time, I do not 
know if that is a reasonable time, but a reasonable time where you 
are all to start together. 

Mr. Allen. Well, I certainly agree with Mr. Weiss that there 
would be radical changes in the industry. 

Senator Packwood. Would it be a desirable change? 

Mr. Allen. Under the current circumstances of that bottleneck, 
called the local telephone network, which all of those calls have to 
move through, it would not be a workable situation, in terms of 
real competition. 

If we nad all this competition, I am all for it. I would like to 
think that we could do it by then, but it seems unrealistic. 

Senator Packwood. You were apparently able to eliminate the 
local bottleneck intrabusiness calls, using a wire that is not theirs, 
within one business. 

Mr. Allen. Well, that is the nature of the way most PBX sys- 
tems are built. In fact, that is a competitive marketplace which 
many other companies could have won the account for Chicago, in- 
cluding Illinois Bell. 

Senator Packwood. But you managed to get aroimd the bottle- 
neck. 

Mr. Allen. No. It is not around the bottleneck, because calling 
within most companies is done through some switching device on 
the premises, or in the central office, if it happens to be served by 
what is generally called a Centrex service or some variation on that 
by the local exchange company. 



201 

Senator Packwood. Does it use Illinois Bell's lines at all to do 
it? 

Mr. Weiss. Yes. It does. 

Senator Packwood. Oh, it does. 

Mr. Weiss. Yes. Just as 

Senator Packwood. Does it even for the intrabusiness? 

Mr. Weiss. I believe that is the way it is. 

Mr. Allen. No. No. Normally the traffic would not flow back into 
the central office and back out, although, I think in earlier days 
that was probably the way it worked, which was not particularly 
efficient. 

Senator Packwood. If you were given — again, I do not know 
what a reasonable time is — a reasonable time to prepare, you 
would still not get around the bottleneck. 

Mr. Allen. I know of no way to do that. But I can do it. As I 
said earlier, it is technically feasible. It is possible. It is not realis- 
tic or practical from a financial point of view. And they ought to 
be the best providers of access. 

Senator Packwood. Thank you, Mr. Chairman. 

Senator Inouye. Senator Gorton. 

OPEING STATEMENT OF SENATOR GORTON 

Senator Gorton. I would like to go back to the fundamental 
questions which Senator Danforth was asking, and followup on 
them. 

I take it that, Mr. Allen, you said that this competition about 
which you spoke, and Senator Packwood spoke, even with respect 
to this local bottleneck, will be perfectly valid and acceptable, as 
far as you are concerned, as long as you were not going through 
a monopoly provider, or as long as there is real competition in the 
provision of the local services, is that correct 

Mr. Allen. That is correct. 

Senator Gorton [continuing]. But that such competition does not 
now exist. Mr. Weiss, now, on the other hand, feels that that com- 
petition does now exist, and so he should be permitted into a busi- 
ness fi'om which he is now prohibited. 

You have asked in your written testimony that we come up with 
an objective definition of "competition," to show when that competi- 
tion exists. 

I, in turn, would ask that both you and Mr. Weiss submit to us 
a definition of what you believe real competition is, so that we 
could determine — Mr. Weiss, evidently, the definition that you 
would provide us would be one which is now, in fact, in existence. 

Nevertheless, from the point of view of policymakers setting 
broad policy, when you are at the heart of the question of competi- 
tion, we ought to have some concept of what each of you believes 
that competition is. 

Are you simply asking us, Mr. Allen, to come up with that our- 
selves, or do you have a proposed statutory definition of the form 
of competition which is necessary, from your perspective, before we 
should allow Mr. Weiss to be in your business? 

Mr. Allen. We do not have a statutory definition. We would be 
glad to work with you and the committee to try and develop one. 



202 

In retrospect, I think Senator Danforth's, to follow the golfing anal- 
ogy, was asking us to establish a handicap system. 

Until we can be sure that we have a handicap system which 
properly defines the marketplace and its competitors, neither of us 
can have the proper handicap to go head to head on the golf course. 

Now, that assumes that I want in the local exchange business to 
begin with, which I do not. But if 

Senator Gorton. You want a competitive local system. 

Mr. Allen. I want a competitive local system, because I think 
that will benefit consumers, it will benefit the Nation, and, yes, it 
will benefit AT&T, because you pay 40 percent of every dollar to 
them. 

Senator Gorton. Since that is so vital to you, it would seem to 
me that you would have a high degree of incentive that is present- 
ing to us a statutory definition of AFTA conditions, so others can 
critique it. 

Mr. Weiss, from your perspective, while I think I followed the 
distinctions between you and Mr. Allen, in connection with Senator 
Packwood questions, I would like to see in writing why it is that 
you think that that competitive situation exists at the present 
time, and not just the statement that competition exists. 

But what is the definition of "competition," which the present sit- 
uation fits, and, therefore, in your view, qualifies you to enter into 
these other businesses? Are you capable of giving us an answer to 
that question? 

Mr. Weiss. Well, we will certainly try. Senator. As I said before, 
it is a complicated issue, but I will try to do that. 

Senator Gorton. I have one ancillary question for you, and I 
think, by extension, to Mr. Allen, who very graciously admitted 
that unconsciously, competitors were inhibited by the previous situ- 
ation, when AT&T, in effect, did it all. 

We have — I am not going to be here when we get to the next 
panel. But we have one example, someone from Hello, Inc., who I 
think is quite typical of many small and struggling companies, in 
one aspect of the communications business or another, who says, 
"Well, maybe theoretically this competition is available now, but 
since I have to go through the RBOC's with all of my customers, 
my customers are told, 'No, my service really cannot be provided, 
and besides we do it better.'" 

And, in effect, in the real world, whatever the theoretical com- 
petition is, the small person is greatly disadvantaged, and prohib- 
ited from competing effectively. 

It is one thing for us here to talk about whether we can create 
a situation in which the two of you, huge corporations, can com- 
pete. 

But how can we also assure that these smaller companies that 
are just starting into the business, and perhaps engaged in only 
one part of it, are treated fairly, I think particularly oy your com- 
pany, and I suspect by Mr. Allen's as well? 

Mr. Weiss. Well, if you look at their growth characteristics today, 
they are veiy successful companies. They have good cost character- 
istics. They have good quality, and they are formidable competitors. 

Not all, but the good ones are. I think that really takes care of 
itself They have found areas of our business that they can enter, 



203 

where they can do that business very well, and they are being very 
successful. And none of the rules that I am proposing will change 
that capability on their part. 

Senator Gorton. So, you do not think, in fact, that there is dis- 
crimination or unfair competition on the part of RBOC's with most 
or many of the struggling companies; is that right? 

Mr. Weiss. They would not have gotten started if there were. 
Now, there are continuously developing rules and policies at both 
the State and Federal level, and interconnection in other matters, 
on a full and fair basis. 

I mean, that is happening. Most of those things are worked out 
among the parties and the local regulator. But they are growing 
companies, and they are vital companies. 

Senator Gorton. Finally, for you, Mr. Weiss, how much do you 
require before you will be perfectly comfortable with the AT&T 
purchase of McCaw? Do you require only what I heard you say at 
one point, the ability for the RBOC's cellular companies to do ex- 
actly the same things that McCaw can do? 

Do you require being able to get back into the long-distance busi- 
ness on a fairly unlimited basis, or do you require not only getting 
back into the long-distance business on a fair basis, but being in 
the manufacturing business, and the information services business 
as well? 

Do you have to have the whole kit and caboodle before you will 
agree that AT&T should be allowed to take over McCaw? 

Mr. Weiss. If AT&T acquires McCaw, which is their first major 
entrance into the cellular business, all I ask is parity. Make the 
rules equal for the players of that game. 

Senator Gorton. What will that require? That does not have 
anything to do with manufacturing, or does it, because AT&T can 
manufacture 

Mr. Weiss. No, There is a manufacturing issue, because AT&T 
is the provider of both the cellular equipment as well as the inter- 
city service. But that is not what we are talking about here. 

We have asked AT&T, and at least we have Mr. Allen's word 
that says they will provide us the same technology in the same 
terms and timeframe that they do anything they use themselves. 

I will accept that, if, in fact, that policy is carried forward. So, 
what I am really asking for is the same parity on intercity capabil- 
ity, that the cellular systems owned by regional companies, which 
are hindered by the MFJ, are given the same kind of privileges 
that AT&T/McCaw would have. 

Senator Gorton. So, information services and manufacturing are 
separate. 

Mr. Weiss. Those are other issues. They are broader issues. 

Senator Gorton. All right. Thank you. 

Thank you, Mr. Chairman. 

Senator INOUYE. Thank you very much. 

Senator Bums. 

Senator Burns. I iust want to followup, and then we can all go 
to lunch here, and I nave some other things to do, too. 

For fear of oversimplifying what we are facing here, I want to 
draw an analogy. I spent about 20 years refereeing football. 



204 

I can work a game in Montana, or Texas, or Florida, or, yes, even 
here in Washington, DC, and have very few problems, or hardly 
any problems, maybe in judgment, but not with regard to the 
rulebook, because the rulebook is the same in every State. It is the 
same. 

I can draw an analogy, when we start forming up legislation, and 
drawing up rules about the RBOC's, and then I think we can go 
over and do the same thing as far as the long-distance carriers are 
concerned, because there is competition there, and maybe one 
rulebook over here, and one rulebook over there. But whenever we 
start making those rulebooks, that is where we start running into 
trouble. 

Now, you, Mr. Allen, say that you do not have any incentive to 
go into the local business, in other words, the local business, or the 
universal business — $25 billion dollars is a lot of incentive. 

And I look at that, £ind I have a feeling: I get very nervous about 
that, but the problem we are having is trying to meld these 
rulebooks, and do it fairly. Is that an oversimplification? 

Mr. Weiss. I am sorry. I thought you were speaking to Mr. 

Senator Burns. Well, whomever. 

Mr. Allen. I am not sure it is an oversimplification. It is pretty 
hard to play a game with a bat when you are football referee. You 
are mixing up the two games. 

I think, to some extent, that is the challenge we face, in that we 
have a competitive game, and we have a monopoly game, if you 
will, and trying to find rules that apply commonly to both groups 
is very difficult. 

And that is why they need rules from one area through the tran- 
sition period, and then the same rules would apply to everybody. 
But it is a difficult challenge. 

Senator Burns. Well, I just think that, I just happen to believe 
that the 40 cents on every dollar that you send to the local univer- 
sal service provider provides quite a lot of incentive to circumvent 
or bypass the local provider, and I will be willing to watch that 
very closely. 

Mr. Allen. That is precisely why I would like to have competi- 
tion at the local level, so that 40 cents out of every dollar moves 
down to some lower number. 

Mr. Weiss. Senator, while I was waiting for Mr. Allen — my 
apologies — I was noting two things. One is that, as Senator Stevens 
pointed out, the game is different in Chicago and Alaska. 

So, the rulebook has to be modified to deal with those cir- 
cumstances, and that is why I still appeal that the local regulator 
has to be brought into the process, as these things unfold, and our 
industry moves forward. 

I also would say to this subcommittee, that the last legislation 
that effectively governs the industry was passed in 1934; therefore, 
I expect that whatever legislation occurs now would last a long 
time. 

The pace of change in this industry is such that if it is not very 
broad, and permits a lot of discretion, it will be outdated within 2 
or 3 years. And that is my concern. It is very hard to stay up with 
what is happening. There is a land mine every week in our indus- 
try. 



205 

Senator Burns. Thank you very much. 

Mr. Chairman, it is all yours. 

Senator Inouye. OK. 

Senator Danforth. Mr. Chairman, could I just add one thing? 

I appreciate everybody's patience. I do not think anybody on this 
panel or Einybody in the audience guessed that we would have been 
here this long today, and we really appreciate your help to the com- 
mittee. 

I would like Mr. Weiss and Mr. Allen to take you up on what we 
talked about earlier, and my hope would be that each one of you 
would designate somebody who has your personal ear to meet with 
us to try to do our best to define wnat does constitute competition 
in the regional market. If you could do that, we would very much 
appreciate it. 

Mr. Weiss. Senator, I am here representing seven regional com- 
panies, so I must say that I feel obligated to include all parties in 
that request. 

Senator Danforth. Sure. 

Mr. Weiss. Thank you. 

Senator Danforth. I mean, that would be my understanding, 
that — I do not think we want a huge room full of people, because 
if you do that, you just get bogged down immediatelv. But just for 
the sake of discussion, or edification of us, if we could have one per- 
son from each. 

Mr. Weiss. I will try to do that. 

Senator Danforth. Thank you. I mean, firom each of you, not 
fi*om — ^thank you. 

Senator Inouye. I have a little problem here. I am prepared to 
stay here all afternoon, if necessary, but as Senator Danforth indi- 
cated, we had no idea that the first panel would be sitting here this 
long. 

It has never happened in the past. Therefore, I feel rather bad 
for the second and third panel, because in all likelihood, because 
of other commitments, you would be lucky if you had two Senators 
sitting here. 

I am willing to have additional hearings, so that you will have 
a broader panel here of Senators to listen to your testimony, but 
I also realize that some of you have traveled long distances to be 
with us, and it may be difficult for you to get back again. 

So, may I call upon the remaining eight witnesses — we will have 
a short recess. If you will, come up here and we will discuss this. 
If you wish to continue, we will continue. 

Thank you very much at this time. 

[A brier recess was taken.] 

Senator Inouye. We have iust decided that panel three, consist- 
ing of Mr. Dean J. Miller and Mr. William F. Squadron, will return 
to the committee at our next hearing. We will continue this morn- 
ing's hearing with the second panel. 

The panel consists of the president of West PubHshing Co., Mr. 
Vance P. Opperman; the legislative director of the Consumer Fed- 
eration of America, Mr. Gene Kimmelman; the superintendent of 
Glasgow Electric Plant Board, Mr. William J. Ray; president and 
chief executive officer of Eastern TeleLogics Corp., and chairman of 
the board of the Association for Local Telecommimications Services, 



206 

Mr. Gary E. Lasher; the secretary-treasurer of Communications 
Workers of America, Ms. Barbara J. Easterling; and the vice presi- 
dent of Administration of Hello, Inc., Ms. Paula Smith Preston. 

On behalf of the committee I thank you ladies and gentlemen for 
your patience and your cooperation. It is very important to us. May 
I now call upon Mr. Oppermein? 

STATEMENT OF VANCE K. OPPERMAN, PRESffiENT, WEST 

PUBLISHING CO. 

Mr. Opperman. Mr. Chairman, Senator Danforth, my name is 
Vance Opperman. I am the president of West Publishing Co, 

We are here to support all of the thrust and much of the lan- 
guage of S. 1086. In the interest of time, let me just briefly outline 
why we believe our experience, and the experience of the informa- 
tion industr>', speaks eloquently for why a law such as 1086 should 
be passed. 

I will speak first for my company, and then for the industry. In 
1982, when the Bell monopoly was broken up — and I will speak in 
general numbers — our company had less than 100 people employed 
fiill time in our electronic publishing products. 

Today, and using roimd numbers, to give you an idea of the order 
of magnitude, we employ more than 1,000 people in that type of ac- 
tivity. 

Our fine competitors, such as the Mead Corp., barely existed 
prior to the breakup of the Bell monopoly, and today is a very large 
and very successful organization doing electronic publishing out of 
the State of Ohio. 

That experience is mirrored in the entire industry. For example, 
according to Department of Commerce studies for the industrial 
outlook for the last 10 years, prior to the breakup of the Bell mo- 
nopoly, less than 10,000 people in this country were employed in 
electronic publishing and the information services industry. And 
today, that number is over 1 million people employed. 

We have a positive balance of trade. We lead the world. The in- 
crease of information services in the world, in the United States, 
56 percent of that information is originated and comes from the 
United States, 32 percent in Europe, and 2 percent in Japan. And 
that gap has widened since the breakup of the Bell monopolies. 

I would be belaboring something that I think this committee 
knows well, and that everyone else in this room I think would 
agree with, and that is, competition is good. Competition created 
this industry. 

Competition gives us new products, new innovation, lower prices, 
and greater access. And the thrust of 1086, the goal is toward 
breaking up now the second type of monopoly, and that is the bot- 
tleneck monopoly. 

And the local exchange, if our experience is any kind of guide in 
this country, will accomplish the same kind of beneficial results 
that we have already seen in information industries. 

I thought for a minute — and with all due respect to Mr. Allen, 
a man I admire — I thought for a moment I might have attended 
a meeting of monopolists anonymous. [Laughter.] 



207 

Mr. Allen said that, Tes, it was true, there was a time when, 
even though I tried not to cross subsidize, I tried not to discrimi- 
nate, yes, mdeed, as a monopolist, I did." 

I do not mean to make fun of that, because that is, of course, 
what the experience has been. And that will be the experience, and 
has been the experience, if we allow the local bottleneck monopoly 
to go without the kinds of protections that we have had to date. 

^d this bill addresses that experience, and addresses it in two 
significant ways. First, there is a recognition that there has to be 
structural safeguards. 

And if those structural safeguards are not put in the local ex- 
change, and if they are not required to be followed, we will have 
exactly that cross-subsidization problem, that problem that we 
know existed, that problem that we observed, that problem that 
was broken up, and once it was broken up, that led to the tremen- 
dous American success story that the information industry is today. 

And second, the legislation talks to the second problem, and that 
is to protect Americans' privacy, the so-called CPNI issue, the issue 
that when you have a monopolist, who gets all of your signal — and 
I use some of the colloquy that was here again — ^yes, it is true, we 
are a customer of the gentlemen who were up here, and we have 
to use the local exchange today. 

Our signals and the signals of our customers go through the local 
exchange. The local exchange knows who those customers are. 
They know the customers of our competitors. They know what they 
order. 

They know how much they pay. They know where they are. And 
they can know what they want, the content of that type of signal. 
Now, I recognize the people who will take the pledge: "I do not 
want to do that. I will not discriminate. I will not do any of those 
things that monopolists do." It is not a matter of individual inclina- 
tion; it is a matter of economic incentive. 

This legislation recognizes that we are to have the advantages of 
competition now, to move in on the local exchange and break that 
up, so that we can enjoy that advantage, that we have to have 
some transition rules. 

And those rules and protections are found exactly where this bill 
finds them, first, in the area of structural safeguards, to prevent 
that cross-subsidization, and second of all, in the CPNI area. 

We have suggested some ways in which we think both of those 
can be strengthened, and they are contained in our testimony. I 
thank you very much for the time. I enjoyed the discussion as a 
customer. 

I certainly want to see the local exchange more efficient. We hire 
them a lot. We want a better signal and a more efficient signal. We 
would like to pay less and have more, which would be the exact re- 
sults to this company and this country, if we pass 1086. 

Thank you once again, Mr. Chairman. 

And thank you, Senator Danforth. 

Senator Inouye. Mr. Opperman, your prepared statement is 
going to be made part of the record, as all of tne others. But your 
statement is much better than the prepared one. [Laughter.] 

Senator IlT was very convincing. 

Mr. Opperman. Thank you, Mr. Chairman. 



208 

[The prepared statement of Mr. Opperman follows:] 

Prepared Statement of Vance K. Opperman 

Good morning, Chairmein Inouye and distinguished members of the Subcommit- 
tee. Thank you for the opportunity to present my views on S. 1086, the "Tele- 
communications Infrastrurture Act of 1993." For reasons that I shall amplify short- 
ly, I sincerely conmiend you for conducting what are path-breaking and potentially 
momentous hearings that strike at the heart of the snibboleth that local exchange 
telephone service is a "natural" monopoly. These hearings are particularly timely 
because pieces of the country's telecommunications structure are rapidly falling into 
place. How well the pieces mil together depends in part on whether Congress over- 
hauls the current system of telecommunications regulation. 

I am Vance K. Opperman. Since August 1, 1993, I have served as President of 
the West Publishing Company of Eagan, Minnesota, a leading publisher of legal ma- 
terials. For the past few years. West has actively woriced witn a coalition of other 
electronic publisners, the Electronic Publishers Group ("EPG"). Although EPG mem- 
bers publish diverse materials, we are all concerned about the potential threat that 
the local bottleneck monopoly poses to our businesses. 

Prior to assuming my current position at West, I was a lawyer in private practice 
for 23 years, serving as counsel to West and specializing primarily in antitrust and 
regulated industries. I have handled numerous cases involving allegations of monop- 
olization and bottleneck abuse. I have also had an opportunity to witness first hand 
how some of the most weU intentioned federal and state regulatory schemes 
foundered in their implementation. 

As you may know, West is an employee-owned information service provider, spe- 
cializing in legal and statutory material. West occupies a distinct place in our Na- 
tion's legal and intellectual history. As the preeminent publisher of legal mate- 
rials — including case reporters, digests, annotated statutes, legal treatises, case- 
books, textbooks, dictionaries, and encyclopedias — West has pioneered a unique 
headnote and key numbering system that in large part organized the American 
legal system. In addition. West created and publishes the United States Code Anno- 
tated and annotated statutes for many states. 

West publishes its materials in a number of formats and distributes them in var- 
ious ways. We have printed books for nearly 117 years. Recently we began offering 
CD-ROM products. We continue to ship both to our customers throu^ traditional 
air and surface transportation systems, such as the U.S. mails, U.P.S. and other 
similar services. 

In 1975, we started WESTLAW, our on-line computer-assisted legal research 
database, which has become an increasingly important component of our overall 
business. Through WESTLAW, our customers dial up our computer data banks in 
Minnesota and enter queries or search terms. Through technological advances, we 
have now been able to provide simplified search and retrieval capability using "nat- 
ural language." Our computers retrieve pertinent legal materials and then pass 
them througn the public telephone network to the 'customer's computer screen. In 
certain circumstances, WESTLAW can provide lawyers with the full text of a judi- 
cial decision within minutes of the court s rendering of that decision. 

WESTLAW is entirely dependent on the speed and reliability of a delivery sys- 
tem — the public telephone system — that we do not and could not own. Any discrimi- 
nation or disruption in telephone service could be extremely injurious to 
WESTLAW. 

Everyone familiar with the legal research process knows that many lawyers — par- 
ticularly younger lawyers — have a strong preference for computer-assisted legal re- 
search over the traditional book system. Everyone familiar with the legal system 
also knows that lawyers win and lose cases on the basis of the thoroughness, accu- 
racy and speed of their research. Our customers have important reasons for de- 
manding complete, accurate and timely service. Under these circumstances, no one 
could dispute that inferior telephone service of any type poses a substantial threat 
to WESTLAW. 

That is why West, and 1 believe most of the members of the Electronic Publishers 
Group, have been so vocal in court and in Congress about the lifting of the 1982 
Modification of Final Judgment's restriction concerning information services. Simply 
put, our concern is with unfair competition from the monopoly supplier of one leg 
of our distribution system — the local exchange bottleneck. 

In the past, we have favored legislative measures to prevent monopoly abuses and 
to ensure that electronic publishers, captive to the local telephone monopoly, are not 
unfairly disadvantaged. As long as the local exchange carriers have monopolies, we 
will continue to favor those measures. At the same time, S. 1086 is more than a 



209 

good first step. It is a bold, direct strike at the heart of the problem — the local tele- 
phone monopoly. For the past 100 years, it has been almost an article of faith in 
the telephone industry that the "^ast mile" of telephonic communication is a "natu- 
ral monopoly." As recently as three years ago, the idea of viable local competition 
was so remote as to be almost the stuff of science fiction writers. S. 1086's approach 
is to say, in the manner of Gershwin, that "It Aint Necessarily So." 

S. 1086 would create a new national policy discouraging monopolies and favoring 
infrastructure development through private investment. With private investment 
and without monojiohes, there shoula be — and will be — plenty of progress with no 
stifling of competition. S. 1086 would emphasize market mechanisms instead of gov- 
ernment regulation as a national telecommunications policy, which will tend to 
maximize output and quality, and minimize price. The genius of the approach is 
that, if properly implemented, it would obviate the need for FCC regulation of com- 
petition, leaving omy the flexible and dynamic antitrust laws in place. In short, S. 
1086 presents an historic opportunity to make competitive rules that will promote 
progress. 

Even a casual ghmpse at the headlines shows that the country is in the middle 
of a technological revolution in computing and telecommunications, complete with 
huge realignments of industry participants and capital. I have set forth, for your 
review, onfy a few of the articles about the telecommunications and conaputing revo- 
lution that have appeared in the national press from the last Subcommittee hearing 
on July 14, 1993, through the end of August: 
July 16, 1993, Wall Street Journal— TictureTel to Introduce $6,000 System to Make 

PCs Work as Video Telephones." 
July 16, 1993, New York Times— "MCI and Northern Telecom to Test Cellular Sys- 
tem." 
July 19, 1993, Wall Street Journal— TV Broadcasters Itch to Deliver Data, Too." 
(WavePhore develops TVTI which will allow broadcasters to transmit 1.5 
megabits of digital data f>er second.) 
July 26, 1993, Wall Street Journal— "Time Warner, In Turnaround, to Join Test of 

Cable TV Service with NYNEX." 
July 29, 1993,Washington Post— "Game for a Multimedia Opportunity, AT&T's Plan 
to Buy a Stake in On-Line Firm Reflects a Bet on Interactivity." (AT&T ac- 
quires a 20% stake in the Sierra Network.) 
July 30, 1993, Wall Street Journal— "MCI, in Bold Move, Wins Allies in Wireless 

Communications War." 
August 3, 1993, New York Times— "Sprint Tying into Wireless Global Net: Investing 

($40 million] in Motorola's Satellite System. 
August 16, 1993, Business Week— "The Parallel Universe Grows: Unisys, Intel and 

IBM Are Moving Into 'Alternative Mainframes.' " 
August 22, 1993, Washington Post— "AT&T's Deal: A Giant steps Into New Arena: 
Deal May Make AT&T a One-Stop Phone Source." (AT&T acquires McCaw Cel- 
lular.) 
August 24, 1993, New York Times— "New British Pact for NYNEX." (NYNEX to in- 
vest $2.25 billion in Mercury Communications, Britain's second largest long dis- 
tance company.) 
August 25, 1993, Wall Street Journal— "Novell, SynOptics to Link Computer 

Networking Efforts." 
August 25, 1993, New York Times— "New Competitor for NYNEX." (Locate Tele- 
phone Company to offer local telephone service- in -competition with New York 
Telephone Company.) 
August 25, 1993, Washington Times— "Major TV Cable Firm to Link with Internet." 
(Continental Cablevision's system will be a pipeline for Internet into the home.) 
August 25, 1993, Wall Street Journal— "Sprint is Expected to Offer New Trans- 
mission Service." (System will use new trafiic switching technology called ATM 
or asynchronous transfer mode.) 
August 26, 1993, Wall Street Journal— "Chip Maker, Pacific Bell Team Up on PC 
Applications." (Intel and Pacific Bell will work together on integrating new 
audio, video and data applications for personal computers.) 
August 27, 1993, Washington Post— "The Baby Bells (3o Hollywood, And We're Talk- 
ing Deals, Baby." 
August 31, 1993, New York Times — "Basic Gear Gives Access to Network of Net- 
works." (Anyone with a computer and modem can access the Internet.) 
I think it is a fair conclusion that, given this level of activity in the industry, it 
is clear that the pieces of the telecommunications infrastructure will fall into place 
with or without Congressional guidance. How well the pieces fall together depends 
in part on whether Congress overhauls the current system of telecommunications 



210 

regulation. S. 1086 recognizes that now is the time to make sensible national policy 
based on competition and private investment. 

The information services industry is a textbook example of how intelligent regula- 
tion can produce vigorous competition. Virtuallv nonexistent during the years of the 
Bell monopoly, the information industry has flourished since — and we say because 
of— the decree. Explosive growth, fantastic diversity and broad participation charac- 
terize information services in America today. Legal materials are but a small part 
of this electronic information cornucopia. Indeeo, the 1993 Industrial Outlook Re- 
port states: 

U.S. information services are expected to expand faster than GDP in 1993 to 
remain among the most active sectors of the economy. Global demand for infor- 
mation services to advance economic, business, and social development will con- 
tinue unabated. Revenues of the electronic information services industry are 
projected to grow more than 16 percent; data processing and netwoik services 
providers by almost 14 percent; and computer professional services by about 10 
percent. 

******* 

The dynamic U.S. information services industry comprises about 26,000 es- 
tablishments competing in the marketplace. In 1992, the industry was esti- 
mated to have more than one million employees for the first time. (1993 Report 
at 25-1). 

The 1991 U.S. Industrial Outlook makes clear that the United States is by far 
the largest producer of information services, providing 56 percent of the world's 
databases, conipared to 32 percent for all of Western Europe and only 2 percent for 
Japan. (1991 Report at 27-2). The 1993 U.S. Industrial Outlook shows that the 
trend of U.S. leadership is continuing: "[I]n 1991, U.S. controlled companies earned 
35 percent of all European computer services and systems integration revenues 
* * * Only U.S. and French-controlled computer services gained market share; com- 
panies from all other countries lost market share." (1993 Report at 25-1). The 1993 
report goes on to say that U.S. companies lead the market overseas because "they 
are acknowledged to provide the world's most advanced and diversified information 
services." (Id. at 25-2). 

Growth, innovative products, vigorous competition, trade surpluses, American 
dominance. Not bad. Prohibiting the Bells from monopolizing information services 
has produced powerful benefits. If you can expeditiously and successfully usher in 
an age of competition within the local exchange, you will produce additional power- 
ful benefits to generations of Americans — without huge expenditures of public funds 
and without an elaborate bureaucratic regulatory apparatus. 

However, the care that must be taken in moving from a monopoly environment 
to a comf)etitive environment cannot be overstated. Failure to nurture competition 
can jeopardize the entire process and skew markets for decades. While we can all 
rejoice at the new economic freedoms of the formerly Communist world, I am sure 
none of us envies the disruptions those economies have experienced in moving from 
state monopolies overnight. Closer to home. Congress chose to deregulate fare struc- 
tures in the airline industry by abolishing the Civil Aeronautics Board in the late 
1970's. Thereafter, the antitrust proscriptions ensuring fiiU competition were at best 
enforced with laxity. The result, of course, is the current drastically altered land- 
scape in the airline industry. Whether or not that landscape appeals to you, it is 
indisputably the product of federal policies adopted to spur the move from carteliza- 
tion to competition. 

My point is that the transition rules necessary to promote competition have ef- 
fects tnat far outlast the transition itself. They will determine for generations to 
come whether consumers will have the benefits of a competitive market. While I do 
not purport to know exactly what the right balance is, I do know that laissez faire 
is not the correct approach. 

West and the Electronic Publishers Group believe that a separate subsidiary re- 
quirement — such as that contained in section 233 of S. 1086 — is absolutely essential. 
Requiring separate subsidiaries is one form of prophylactic regulation that is clear 
and entails a minimum of government activity. In fact. West and the Electronic 
Publishers Group support changes that reqruire the RBOCs' separate subsidiaries to 
be truly separate and proposals that' manaate that the RBOCs deal with their sub- 
sidiaries at arms-lengtn and in a non-discriminatory fashion. Such proposals should: 
(1) prohibit the sharing and ownership of all facilities; (2) require the separate sub- 
sidiaries to have separate directors, oincers and employees; (3) require separate sub- 
sidiaries to obtain transmission capacity from their affiliated BOCs solely pursuant 
to generally available tariffs; (4) prohibit joint activities of any kind, including oper- 
ations, production and research and development; (5) require more than de minimus 



211 

outside ownership of separate susidiaries; and (6) require separate subsidiaries to 
have separate financing and to prepare and file financial -statements as if they were 
pubUcly held corporations. 

Why not continue to rely on Computer Hi-type regulation by the Federal Commu- 
nications Commission? Because pricing manipulation, withholding of access to new 
innovations in the network, and strategic timing in the release of technological de- 
velopments are all practices that the FCC has been unable to detect adequately in 
the past. 

As Geoi^ Santayana said, "Those who are ignorant of history are bound to repeat 
it." The AT&T case was largely about the shortcomings of FCC regulation in pre- 
venting the Bell system from stifiing progress and crushing competitors. Even now 
there are grave warning signs about the inadequacy of FCC regulation. In a Feb- 
ruary 3, 1993, Report to Congress, entitled "Telecommunications, FCC's Oversi^t 
Efforts to Control Cross-Subsidization," the General Accounting Office reported that: 
In 1987, we reported that the FCC had insufficient staff to ensure that con- 
sumers were protected from cross subsidization. Since that time, FCC's respon- 
sibility for overseeing carriers' cost allocations have continued to grow, but the 
staff resources allocated to this function have declined rather than increased. 
We believe the number of FCC auditors remains inadequate to provide a posi- 
tive assurance that ratepayers are protected from cross-subsidization. 

Increasing the FCC staffing level * » * would cave little or no impact on the 
federal budget because the government would be reimbursed for its on-site au- 
dits and reviews of the CPA audits through fees FCC is authorized to collect 
from carriers. Given this trend of increasing work load and decreasing re- 
sources, the potential exists for ratepayers to be more vulnerable, to inappropri- 
ate charges resulting from cross-subsidization in the future. (GAO Report at 12, 
emphasis added). 
The separate subsidiary requirement is intended as a regulatory device to assure 
that the BOCs do not abuse their monopoly position. Heretofore, much of the public 
debate has focused on whether the local exchange monopolies have abused or would 
abuse that position. Once the local bottleneck is broken, however, that debate be- 
comes irrelevant. Therefore, at the point there is effective competition, you may 
wish to sunset the separate subsidiary provision. 

Both during the transition and in the long run, the best remedies for redressing 
unfair competition are the damage and injunctive provisions of the Sherman and 
Clayton Acts. There is no question that private antitrust cases are not perfect, but 
they are surely preferable to relying on government enforcement of regulations. I 
sincerely commend you for not in any way diminishing the applicability of the anti- 
trust laws. You may wish to reinforce your intent by including a strong antitrust 
savings clause with a narrowly crafted exemption for RBOC activities specifically 
mandated by the FCC. 

S. 1086 addresses another important issue — privacy. By virtue of their monopoly 
status, the RBOCs have unique access to a -huge amount of information regarding 
their customers' network usage and calling patterns. This knowledge, if misused, 
poses a substantial threat to individual privacy as well as offering the RBOCs a sig- 
nificant competitive advantage. West and the EPG believe that customer privaQr 
should be of paramount importance, and commend the authors of S. 1086 for their 
obvious appreciation of the American public's privacy rights. We also strongly sup- 
port S. 1086's approach of making sure that the RBOCs and their competitors are 
subject to the same rules. However, as written, section 234 of S. 1086 would impose 
ironclad strictures that may prove too inflexible in practice. The Electronic Publish- 
ers Group has submitted alternative language to the Subcommittee for its consider- 
ation. Our draft CPNI language seeks to allow fair access for competitive providers 
to customer information that does not raise substantial privacy concerns, and we 
hope that the Subconmiittee will work with us in improving this important section 
of the legislation. 

CONCLUSION 

In sum. West and the Electronic Publishers Group believe that effective local com- 
petition is far superior to regulation as a national telecommunications and informa- 
tion services policy. However, competition will not be created overnight. Until mean- 
ingful, effective competition exists in the local exchange, strong structural safe- 
guards must remain. 

Senator Inouye. I now call on Mr. Kimmelman. 



212 

STATEMENT OF GENE KIMMELMAN, LEGISLATIVE DIRECTOR, 
CONSUMER FEDERATION OF AMERICA 

Mr. KiMMELMAN. Thank vou, Mr. Chairman. 

Mr, Chairman, Senator Danforth, and Senator Packwood, I guess 
I am representing the customers of monopolists anonymous today, 
representing consumers. I do not think I can outdo Mr. Opperman, 

But I am going to abandon what I have prepared, because I take 
Senator Danforth's comments to mean that really what you are in- 
terested in is a working session, to get amendments for a markup. 

It seems to me it would be better to focus on observations on the 
first panel, because I think it got to the heart of the matter. The 
committee seemed to raise the questions that were crucial to work- 
ing out this issue. 

It seems to me that it is obvious that everyone believes the an- 
swer is somehow local competition. It provides the consumer a 
choice. It provides all the providers a choice. It allows the local 
phone companies to get away from this bottleneck problem that has 
been the basis of litigation, and enables them to get into every 
market. 

The problem really is, as we know, competition is usually evolu- 
tionary. Competition does not necessarily become available to ev- 
eryone universally across the country in each market. 

And we have heard from many, as Senator Bums has pointed 
out, that there are claims that local rates could go up significantly 
where competition does not develop, or where there may be sub- 
sidies involved, and that we need to update our insurance policy, 
that we have always called universal service, to make sure that we 
do not have that dislocation. 

And we have the problem of measuring competition, as you 
pointed out. Senator Danforth. 

Now, S, 1086, I think, lays out the framework for dealing with 
all these problems, and it gives us the broad outlines of a new pol- 
icy. But what we are concerned about, from the consumer's per- 
spective, is getting the refinements that make sure that we really 
solve these problems. 

Everyone this morning spoke about preserving universal service, 
and if I understood correctly, was committed to doing so. And I 
would suggest that what the committee needs to do legislatively is, 
frankly, make them put their money where their mouths are. 

Come up with the details of what universal service is legisla- 
tively, so we can go forward with that small insurance policy in the 
areas where competition does not develop. 

So, these are our proposals for your legislation. And they are just 
straightforward amendments that will provide full consumer pro- 
tection, we believe. 

Let us amend the bill, S. 1086, to ensure that we preserve the 
declining real-cost tradition of local phone service. We need to re- 
vamp the high-cost fund for rural areas. We need to modify the life 
line fimd. 

We need to make sure that people with disability receive the 
equipment they need. We need to make sure that average consum- 
ers have a new support mechanism, that used to be paid through 
access charges, in a monopoly environment, with a new mechanism 
that fits a competitive environment, that does not disadvantage 



213 

any carriers. This detailed definition of "universal service" would 
be the first change. 

The second change would be to focus on what competition is. We 
would suggest, as Senator Danforth mentioned earlier, something 
like from the cable law, or, frankly, it was in your bill. Senator 
Inouye, in the last Congress, that measures competition, and basi- 
cally once we have competition with an objective entry test, we 
allow everyone into every market. 

And, third, because there may be difficulties in actually pinpoint- 
ing actual local competition or maintaining competitive stimuli 
throughout the market, we need to make sure we have detailed 
safeguards. Cost allocation rules and competitive safeguards will 
protect consumers where competition does not develop, will protect 
competitors, so that we get as much competition in every market 
that can actually sustain it. Only carefully crafted safeguards will 
let the market determine where competition can exist. 

With these amendments, we would support S. 1086. The frame- 
work is there. These are just really putting meat on the bones. And 
I think the comments from this morning clearly indicate the direc- 
tion we can go to move this, and have a fully competitive tele- 
communications environment that preserves reasonably priced 
phone service for all consumers. 

Thank you. 

Senator iNOUYE. Thank you. I now call on Mr. Ray. 

STATEMENT OF WILLIAM J. RAY, SUPERINTENDENT, 
GLASGOW ELECTRIC PLANT BOARD 

Mr. Ray. Thank you, Mr. Chairman. 

I am from a small town in Kentucky, and this is pretty oppres- 
sive to me, so if I forget to breathe during my statement, I hope 
you will remind me. [Laughter.] 

The electric utility, especially a public power system like Glas- 
gow runs, would appear to be a very small fish in a big sea com- 
pared to the people who have been here this morning. 

But the reason I felt moved to come here was that I was afraid 
that there was going to be a King Solomon-type action taken here, 
and that the future of this technology might be divided among the 
cable companies, and telephone companies, and others, and some 
of the real benefactors of this technology might be left out. 

To explain that, I am just going to talk about what has happened 
in Glasgow already. Glasgow, as you might have imagined, is not 
the technological center of the universe. 

It is just a normal town, not unlike 10,000 small towns in the 
United States. We operate a municipally owned electric utility, a 
public power system. We buy all our power from TVA, 

Over the last decade or so, TVA has sent us price signals, hints, 
if you will, every month, that a KW demand on peak was some- 
thing to be avoided. That is not uncommon. Most electric utilities, 
especially the larger ones, are dealing with this issue of demand- 
side management and load management. 

We decided to build a communications network in order to re- 
spond to that need, to position ourselves to offer real-time electric 
rates, and to automate our electric system, so that we could make 



214 

the existing facilities last longer, and to mitigate some of the 
charges we were getting every month from TVA. 

We did not know when we built that system that we were build- 
ing the local portion of an information superhighway. We were try- 
ing to build a system, a broadband network, that was interactive, 
able to move information bidirectionally between the utihty and 
each of our customers. 

And the people of the community elected to have us put a com- 
petitive cable television service on that same network. It has 
worked very well for those two purposes. 

And we built a system that had enough lanes on it to serve those 
electric utility needs that we could see now, for competitive cable 
television service, and other lanes for purposes that were not at 
that time known. 

I can tell you how competition works. With respect to cable tele- 
vision, the way that we have discovered to attract private invest- 
ment in infrastructure is to create competition. We are served by 
a cable operator who did not keep the most sophisticated equip- 
ment available in Glasgow before competition. 

Now that everyone in town has the opportunity to choose be- 
tween a private cable operator or the municipally owned one, their 
basic cable service has gone from just over $14 a month for 23- 
channel service, to a 48-channel service for $5.95 initially and 
slightly higher rates now. The telephone gets answered now by ei- 
ther company. 

In general, the service has ramped up to that which everyone 
would dream of, and the thing that has caused is competition. It 
is a model that has proven itself before in our history. 

In fact, when I listened today about people speculating on how 
this telecommunications technology might evolve, it struck me that 
the best way to look at the future, to predict the future of this tech- 
nology is to simply look at the past, how electric power became in- 
grained into the fabric of our daily lives. 

The situation was very similar at the beginning of this century. 
A few very large investor-owned power companies served most of 
the customers, and the rural communities generally did not get 
that new technology — electricity^first. 

That is what caused public power to develop, was this fierce 
independence on the part of many small communities to say, if we 
cannot get you to bring this new technology in, we will do it our- 
selves. That is what we did with cable television, just copying that 
same model. 

Now, one of those lanes, or a couple of those lanes on our high- 
way, that were not populated in the beginning, are being used to 
furnish alternate local dial tones. We already have a competitive 
telephone service in Glasgow. 

We use a technology from a company called First Pacific Net- 
works, that allows you to provide telephone service over a 
broadband system. . 

GTE is showing a great deal of interest in what we are doing. 
They have not responded in the same way that the cable operator 
did, but I think that it is a logical conclusion to draw that once we 
really roll this out, there will be a similar impact and benefits simi- 



215 

lar to those resulting from competition in cable television will flow 
to the people of Glasgow. 

We are also doing a 2-megabit-per-second data network on that 
highway throughout the community. The price we are able to 
charge for it is rather shocking to the phone company. It is 2 
megabits per second. We sell it for $19.95 a month. The phone com- 
pany classically, for T-1, which is a little slower than that, may 
charge $1,000 or $1,200 a month. 

So, the lesson is vivid there. In this bill, where vou ask the ques- 
tion, "How can we get private investments to build this infrastruc- 
ture?" the answer lies in the history of both public power and now 
in what hopefully will happen in cable TV. The answer is competi- 
tion from municipally owned systems. 

I would add that the legislation that you pass, hopefully, should 
be direct and to the point, and not apologetic in nature. 

The reason I am making that point is that, with the cable bill 
that got passed last year, the objective was to foster more competi- 
tive systems, like Glasgow's. One of the tools that that bill uses to 
accomplish that is making sure that the product is available to ev- 
eryone, that there cannot be exclusive contracts between progpram- 
mers and cable operator for programming. 

I am here to tell you that the final version, after everybody got 
through with it does not accomplish that goal. There is a large cor- 
poration in Atlanta, called Turner Networks, that is still not selling 
their product as envisioned by the bill. 

It is not having the desired effect in promoting competition that 
it could. I would ask you, or I would urge you to, in this legislation, 
that if it is truly competition that you want, let us not banter 
around about it; let us have a forceful statement that all vendors 
must sell their services in a nondiscriminatory fashion. 

We want, for instance, public power to have the capability to act 
as a catalyst, to satisfy its own needs, and to foster the competition 
and the private investment that the history has proven will work 
as it did with electric power. 

We would like for that same theme to carry through to cable tele- 
vision and these other telecommunications technologies. 

There is a large number of public power systems out there wait- 
ing to do that, not speculating on what may happen 4 or 5 years 
from now, but ready to put wire in the air, and do this tomorrow, 
if we can just make sure that the same fertile ground that they 
have had for electricity will exist for these other telecommuni- 
cations technologies. 

Thank you. 

Senator INOUYE. Thank you very much, Mr. Ray. 

[The prepared statement of Mr. Ray follows:] 

Prepared Statement of William J. Ray 

Good morning. My name is William J. Ray. I am the Superintendent of the Glas- 
gow Electric Plant Board in Glasgow, Kentucky, and Chairman of the American 
Public Power Association Cable Communications Committee. The Glasgow Electric 
Plant Board is a municipally owned electric utUity and member of the American 
Phiblic Power Association. Our community owned utility is organized just like the 
other 2000 members of the American Public Power Association. It was set up to pro- 
vide a vital service, in the manner dictated by the local citizenry, to the people who 
own the utility, the people of Glasgow. I would like to thank the subcommittee for 
the opportunity to provide testimony at today's hearing. 



216 



SUMMARY 



The purpose of my testimony is to inform the members of the subcommittee of 
the role that public power systems Uke Glasgow's can play in constructing and oper- 
ating the "iniormation superhighway" in their communities. In order to illuminate 
this capability, I will describe the "Tbroadband highway" proiect that we have already 
established in Glasgow, Kentucky. Although we did not realize we were building the 
"information superhighway" when we started our project in 1988, since then it has 
been widely recognized as a harbinger of things to come in bringing communities 
into fuU realization of the *information age". Our project has been recognized this 
year as one of twenty five finalists in the Innovations in State and Local Govern- 
ment Awards Ingram of the Ford Foundation and Harvard University. We have 
also hosted representatives from over 250 other conMnunities that have come to 
Glasgow to study our project for possible replication in their communities. 

GLASGOW'S STORY 

In the mid 1980's, the Glasgow Electric Plant Board began to speculate on wheth- 
er it might be wiser to build communications facilities that would enable people to 
use less electricity than continuing to buUd more electric generating capacity. Al- 
though little was known about this theory, we decided to embark upon a voyage of 
discovery. In 1988 we began constructing a community-wide interactive communica- 
tions-network consisting of 120 miles of coaxial cable which connects to every home 
and business in the City of Glasgow. Initially we planned to use it for two purposes. 
The first was to help consumers lower their electric bUls by giving them constant 
information about their rate of energy consumption. The second was to offer a cable 
television service in direct competition with an incumbent cable operator in order 
to allow the benefits of competition to flow to the people of Glasgow. Our voyage 
has been exciting and we have discovered a lot. 

From our fairly crude experiments in utilizing the flow of information to offset the 
need for a larger flow of electricity we have made some astounding discoveries. We 
have enough experience under our belt to project that we can defer about 3 KW of 
demand on peak from each home utilizing our information network, We spent about 
$500 per home passed to install the network. That means we are acquiring electrical 
capacity at an unheard of rate of $167 per KW! That is likely less than one tenth 
the cost of constructing new generating capacity! It is results like these that make 
the electric utility industry one of the most likely purveyors of the "information su- 
perhighway". We have the most to gain. 

Our experience in competing with a private cable operator also adds credence to 
this BUl's intention to encourage private investment in the nation's communication 
networks. Once plans to construct the municipallly-owned broadband network were 
announced, the private cable operator (TeleScripps Cable Company) suddenly found 
an interest in reconstructing their outdated plant and drastically lowering their 
cable television rates. Before construction of the municipal system, the private oper- 
ator had a system capable of delivering 36 channels of video and sold a basic pack- 
age consisting of about 24 channels for $14.25 per month. After construction began 
on our system, overnight they found the capital necessary to upgrade their plant 
to a state of the art 54 channel system and oegan offering a basic-package consist- 
ing of 45 channels for $5,95 per month. In short, we discovered that competition in 
the telecommunications marketplace does deliver the effect desired by this Bill. 

About two years ago, we were contacted by a company called First Pacific Net- 
works in Sunnyvale, California. They had heard about our broadband network and 
asked if we were interested in installing their technology on our system. They de- 
ported that their technology would allow us to conduct telephone traffic on our 
broadband network, completely separate and independent of the local telephone 
company. We were interested, and we have installed this equipment on our network. 
It is working very well and we are learning a lot about the telephone business. This 
is where the capacity of public power systems to buUd the "information super- 
highway^ really begins to take shape. Municipally-owned systems are generally im- 
mune from regulation by state public utUity commissions, thus, they have the capac- 
ity to take bold steps lUie the ones we have taken without the laborious process of 
seeking approval from regulatory agencies. Utilizing the First Pacific Networics' 
technology, we stand on the shore preparing to sail off into the uncharted waters 
of head-to-head competition for the provision of local dial tone. Meanwhile, GTE (our 
local telephone company) spends a lot of time gazing at us from the distance, and, 
we assume formulating their plans for responmng to competition. We expect their 
response to be similar to the cable operators. Suddenlv the people of Glasgow wiU 
be offered more services at a lower rate than they would have ever thought possible 
from the phone company. Competition is certainly a magical elixir. 



217 

Recently, we have discovered the capacity of our broadband network to carry high- 
speed data throughout the community. Residents of Glasgow with home computers 
and access to our broadband network can utilize education software residing on file 
servers at local schools, access reference material on CD-Roms in the local lioraries, 
query government geographic information data bases and soon do their grocery 
shopping, banking, and receive health care services all through their home computer 
hooked to Glasgow's "information superhighway" - These are not pie-in-the-sky pre- 
dictions or prognostications about wnat may happen in a few years. These thmgs 
are already happening today in a small-town in south-central Kentucky that decided 
to build the "inlormation superhighway" for itself because it was not likely to have 
access to such a facility anjrtmae ouring this century otherwise. 

ELECTRIC POWER AS A MODEL FOR THE INFORMATION SUPERIDGHWAY 

The developments in telecommunications technology in the final years of this cen- 
tury bear a striking similarity to the developments m electric power (the new tech- 
nology at that time) during the first years of this century. Today it is impossible 
to read a newspaper or magazine and not come across news of a proposed alliance 
between a telephone company and a television cable company or a computer manu- 
facturer. These alliances supposedly wiU bring about unimaginable benefits to our 
pwple through mastery of new telecommunications and computer technology. 

Tne early years of the twentieth century were a similarly exciting time lor Amer- 
ica, From coast to coast word spread about the mind-boggling marvels of electric 
light and power. National excitement coursed across the country, seemingly as rap- 
i(fly as electric power today races through modem long distance transmission lines. 
There is a lesson to be learned in this parallel. 

FHiblic power grew out of a concern in many local communities that the benefits 
of the new technology would not sufficiently serve many smaller communities, so 
they decided to do it themselves. The electric utility industry heated up in the 
1920's as controversy between private power companies and public power systems 
made headlines and captured the attention of Congress. Controlling oy far most of 
the country's electrical market and wanting more — a handful of powerful utility 
holding companies waged a campaign to discredit "government in the power busi- 
ness" £is a tnreat to democracy. By 1934 private power holding companies bought 
out more than 1,500 municipal electric systems to increase their monopolies. Soon 
16 holding companies, whose political and economical clout was unrivaled, con- 
trolled nearly 85X of the countries entire supply of electricity. Public outrage over 
this "power trust" prompted Franklin D. Roosevelt to hail the "undeniable right" of 
a community to establish public ownership of electric service as a "birch rod in the 
cupboard" to help protect consumers against abuse. 

The lessons we learned in democratizing electric power provide a vivid road map 
that can be utilized in the democratization of today's telecommunications tech- 
nology. By following this road map, we can avoid the mistakes made in electric pow- 
ers fegacy. This Bill asks the rhetorical question, "Who should be permitted to pro- 
vide these new services?" We believe that Glasgow's experience indicates that public 
power is capable of not only constructing the "information superiiighway" but indeed 
has already begun constructing it. We also believe that public power's ability to do 
so should not be hampered by any federal or state legislation. 

Some of the "information superhighwajr" should be built by a combination of tele- 
phone companies and cable television companies and others, but the public should 
also own and operate a number of these highways following our countries' model for 
electric power. President Franklin D. Roosevelt helped create this model by pushing 
for federal hydroelectric developments on the Columbia River, which he said would 
create "forever a national yardstick to prevent extortion against the public and en- 
courage the wider use of the servant of the people * * * electric power." This "yard- 
stick" has served the people of this country well in the provision of electric power. 
The same model will worK just as well in the twenty-first century for the provision 
of high technology telecommunications. 

Senator Inouye. Mr. Lasher. 

STATEMENT OF GARY E. LASHER, PRESmENT AND CHIEF EX- 
ECUTIVE OFFICER, EASTERN TELELOGICS CORP^ AND 
CHAIRMAN OF THE BOARD OF THE ASSOCIATION FOR 
LOCAL TELECOMMUNICATIONS SERVICES 

Mr. Lasher. My name is Gary Lasher. I am president and CEO 
of Eastern TeleLogic Corp. I am one of the competitive access pro- 



218 

viders that Mr. Weiss thinks has taken all of his business from 
him. 

In fact, we are a very small industry of some 30 companies that 
operate throughout the United States. We do somewhere in the 
range, in 1993, of $250 to $300 million a year, on a market base 
of $25 billion for services that we can offer today. 

Obviously, our interest is to open up competition in other areas, 
so that we can offer additional services, and so that we can afford 
to take them out to some of the more rural areas in the United 
States. 

I might say that many of nw fellow companies that are in our 
organization, the Association for Local Telecommunications Serv- 
ices, operate in many of the constituencies represented by people 
on this committee; just to name a few, Seattle WA, Portland, OR, 
Phoenix, Richmond, Omaha, Dallas, Boston, and some other ones. 

What we provide is competitive access networks. We build the so- 
phisticated on-and-off ramps to the Nation's telecommunications 
intercity networks, such as those provided by AT&T, MCI, Sprint, 
and others. 

First, let me say that we support Senate bill 1086, and commend 
the authors, along with their staffs, which we have had quite a bit 
of discussion with, for creating a bill that is necessary to ensure 
that telecommunications support the economic growth that the Na- 
tion must make during the nineties and beyond. 

An imderlying policy and implementation statement, such as 
Senate bill 1086, is needed now — and I mean now — to set the stage, 
and provide Federal guidance to the industry, the regulators, both 
Federal and State, and the country, during a much needed transi- 
tion from a monopoly to a competitive environment. 

If we do not pass this bill, there are forces that will conspire to 
make the evolution to competition a slow, arduous process, if it 
ever occurs at all. 

I might give you a couple of examples of things that have hap- 
pened in my area in Pennsylvania. Incidentally, my background is, 
I come from a monopoly. Originally, I was with CONTEL, which 
was a telephone company that developed telecommunications in 
many of the rural areas in the United States. 

But let me give you a flavor of the environment that exists out 
there today. In my own market in Pennsylvania, the existing mo- 
nopoly continues to game the regulatory system in pricing strate- 
gies and procedural filings, designed to hinder development of a 
competitive market. 

My company has been subject to several nuisance complaints by 
the Bell operating company, complaints filed without any basis, 
that continually task our limited financial and personnel resources. 

The thought of a competitive marketplace is so foreign and so up- 
setting to some of these people that they will fight it with tooth and 
nail. In fact, competition will bring more services to more cus- 
tomers, not limit their access. 

Competition and universal service are not universally exclusive 
policies. We, as a company, and we, as an industry, support univer- 
sal service. And we are prepared to work with restructuring the ex- 
isting universal service program so that all of these new services 
can be brought to all areas in the United States. 



219 

We do have one issue with that, of course, and that is we do not 
want to give the money to our competitor, the monopoly carrier, to 
dole as they deem fit. We think it should go directly to the end 
user. This is one of the areas we think is important in the bill. 

The bill, in order to ensure that the implementation of true 
measurable local competition is achieved during the follow-on regu- 
latory process, needs further guidance with respect to safeguards, 
particularly, in the area of, "mien does competition exist?" 

We are small people out there. If we just open it up to competi- 
tion in a moment's notice, the monopolistic power could put us out 
of business in no time at all. 

We believe that there must be safeguards, only through the tran- 
sition period. And once that transition period is completed, then we 
are prepared to compete in an open market. 

We think there are a lot of benefits to Senate bill 1086. If we had 
to take it as is, we would take it as is, but we believe that with 
improved safeguards, it will be a much improved bill, and it will 
be more effective to what the Nation really needs. 

Thank you. 

Senator Inouye. Thank you very much, Mr. Lasher. 

[The prepared statement of Mr. Lasher follows:] 

Prepared Statement of Gary E. Lasher 

Mr. Chairman and members or the subcommittee: My name is nary Lasher, and 
I am President and CEO of Eastern Telelogic Corporation, headquartered in the 
greater Philadelphia area. As Chairman of our industry organization, the Associa- 
tion for Local Telecommunications Services (ALTS), I am honored to testify today 
in support of Senate Bill 1086, the Telecommunications Infrastructure Act of 1993. 

ETC believes that market forces should be used to accelerate private investment 
in communications facilities and services, without the need for undue government 
investment incentives. We see the key benefits of the local telecommunications com- 
petition fostered by this bill as permitting the development of consumer choice in 
a critical segment of our economy by speeding the deployment of an advanced infor- 
mation infrastructure. Through the policy prescriptions contained in this bill, we 
can develop the richest variety of features and functionalities, those vital to the eco- 
nomic health and future growth of our economy and the maintenance of our global 
leadership in telecommunications. 

EASTERN TELELOGIC AND THE COMPETITIVE ACCESS INDUSTRY 

Eastern Telelogic was founded in 1986 by entrepreneurs using private venture 
capital. The company now has over 175 miles of fiber optic loops connecting over 
230 commercial office buildings to each other and to interexchange carriers. ETC 
provides an array of voice, video and data communication services to approximately 
400 telecommunications dependent businesses. 

My company is part of a new industry, consisting of approximately thirty entities 
serving over 50 cities, including many with constituents represented by the mem- 
bers of this committee; cities like Seattle, Portland (Oregon), Phoenix, Richmond, 
Omaha, Dallas and Boston. Like ETC, these companies build, own and operate local 
digital fiber optic, microwave and PCN networks. We are the creators of the sophis- 
ticated on and off ramps to the nation's telecommunications interexchange high- 
ways. Our industry is just beginning, having only emerged in the mid-eighties. Our 
market remains small, relatively a flea on the back of the elephant of the local tele- 
communications market, but our use of the most advanced applications and empha- 
sis on customer service, particularly for the most telecommunications dependent in- 
dustries, are what users want. In just a few short years, we have created competi- 
tive pressures that have improved overall local telecommunications services. We are 
only limited in bringing these benefits to as many consumers as possible by the vast 
array of antiquated regulatory restraints designed for a monopoly environment. 

And the truth is that the monopoly local exchange carriers — no matter how well 
intentioned — simply cannot be all things to all people, everywhere, all the time^jper- 
fectly. Consumers want choices; choices of services and choices of suppliers. Thus, 



70-334 0-94-8 



220 

opportunities have arisen for entrepreneurs and investors to respond to consumer 
demand by offering new and better services using new and better technologies. Com- 
petitive local telecommunications service providers address market needs for service 
and network diversity that cannot be met by a sole provider. These needs have not 
been limited to only large users of telecommunications services. Many small busi- 
nesses, such as florists, pizza parlors, and mail order retailers, are critically depend- 
ent upon their phone services and thus are seeking out the type of options supplied 
by my company as well as other competitive providers. 

S. 1086 CONFRONTS CRITICAL POLICY ISSUES FACING THE DEVELOPMENT OF LOCAL 
COMPETITION AND PROVIDES VITAL AND ESSENTIAL DIRECTION 

We commend Senators Inouye and Danforth for their vision. They have recognized 
that the federal government must help in bringing the benefits of competition to the 
local telecommunications market, the last bastion of monopoly control. The issues 
that are under consideration here are critical to the overall development of our 
country's telecommunications infrastructure and thus our economic development. 

The core issues addressed by government policy and regulation in this bill are es- 
sentially how to inject competition and prevent monopoly abuse and how to ensure 
fair and effective opportunities for universal access to vital conmiunications services. 

I believe there has developed a consensus that the best way to bring innovation 
and affordable service to the public and prevent monopoly abuse is to encourage 
competition. We have definitely seen the public benefits of competition in the com- 
munications equipment and long distance markets. However, competition will not 
come to the local exchange market anytime soon, if at aU, by "doing nothing^. The 
current policy structure is stacked against the newcomer. We are often prohibited 
from entering markets or fully using our facilities. We are left to deal with monopo- 
listic incumbents, who have no incentive to act fairly. And, vou must remember, for 
new players delay is tantamount to death, as a failure to develop new sources and 
avenues of business results in the lack of a viable market. 

Let me give you a few examples of how the current regulatory system is designed 
to foreclose new entrants to tms market. In many states either legislation or public 
utility regulation specifically preclude the introduction of local or intrastate competi- 
tion. In many of the states represented on this committee, Arizona, Nevada, South 
Carolina, South Dakota, Virginia and Hawaii, the benefits of local competition only 
go to interstate customers. And to the best of my knowledge, even in states that 
are more pro-competitive, no alternative provider has yet been permitted to com- 
plete local calls for end users in competition to the entrenched monopoly provider. 

Even the Federal Communications Commission, which has espoused a policy of 
opening the local interstate access market to competition, has adopted policies that 
effectively limit the development of that competition. With the Orders mtrndating 
collocation, the FCC has also allowed the local companies to initiate unwarranted 
degrees of pricing flexibility in areas where competition has not yet been truly es- 
tablished, pricing flexibility that actually encourages cross subsidization, udder 
these policies, only consumers who happen to live in areas where competitors are 
located benefit from these non-cost based rates offered by the local exchange car- 
riers. And that benefit will be short lived, since competition will not survive. 

What government can and must do is ensure that all participants in the market- 
place have equal opportunity to serve customers, and none have the opportunity to 
unfairly preclude competition. Once full and fair local exchange competition is estab- 
lished, it will be appropriate to reduce or eliminate economic regulation of conipeti- 
tive services. However, to deregulate before effective competition is established 
would be to foreclose the development of competition entirely. The incumbent local 
exchange company would be able to utilize its monopolistic powers to effectively bar 
new entrants entirely. As CompTel testified before this subcommittee in July, the 
market for local compjetition is still in the most nascent of stages, with less than 
1.5 percent of the nation's access to local markets being supplied by entities other 
than the local exchange provider. We have a long way to go before there can be any 
claims of the existence of true competition or visible measures of market inroads 
into the local market by competitors such as ETC. 

WHY S. 1086 IS NEEDED AND NEEDED NOW 

S. 1086 provides what ETC and the other members of ALTS consider the essential 
elements for converting an outdated monopoly for local telecommunications into a 
vibrant competitive marketplace, specifically: 

) S. 1086 recognizes the need for the federal government to ensure that competi- 
tion reaches all potential customers, by allowing all providers to access the essential 
facilities of the telephone network remaining under monopoly control. All carriers 



221 

that control essential bottleneck facilities must make those facilities available to 
other carriers on a nondiscriminatory, unbundled basis, at cost-based rates. Such es- 
sential facilities include: switching elements, transoort elements, signalling systems, 
data bases, and rights of way (conduits, poles). By mandating interconnection of 
competitors with essential local telephone company facilities, barriers to entry are 
removed. 

2) S. 1086 (following on the recently enacted Omnibus Budget Reconciliation Bill) 
recognizes the need for the federal government to overturn antiquated state and 
local regulations. As I indicated just a moment ago, progress to date in achieving 
some form of local competition at the state level haa been slow, cumbersome and, 
in some cases, prohibitively expensive for potential new entrants. Even on an inter- 
state basis, it has taken more than six years just to achieve permission to compete 
for a small portion of the market. The delays in removing regulatory barriers to 
entry may force many potential competitors to abandon their efforts. In addition, 
competition in smaller communities and rural areas will only be possible when com- 
panies can economically support the investment, hastened bv access to a broader 
array of services. Without this legislation, it wUl be well into tne next century before 
the process is complete, if ever. 

What does this mean for business in any given location? As businesses seek to 
locate in friendly, technology-rich areas, it is tne locales that offer a variety of tele- 
communications resources, resources spurred by competition, that will attract new 
investment dollars. Those conmaunities that lack a diversity of service providers and 
offerings wUl see businesses locate elsewhere. 

3) S. 1086 recognizes that the nation's telephone numbers are a national re- 
source, which should not be controlled by a single entity or by the historical provider 
of local service in a particular geographic area. The ability to change service provid- 
ers and keep one's telephone number places control of the number in the proper 
hands, that of the consumer. This ability has spurred tremendous competition in the 
market for 800 services and it will similarly spur competition for local services. 

4) S. 1086 properly recognizes that companies do not do business for free. The re- 
ciprocal compensation agreements presented in the bill will allow all carriers to be 
reimbursed for the use oT their networks. 

5) S. 1086 properly mandates that government must also oversee the setting of 
interoperability standards so that telecommunications becomes an interconnecting 
"network of networks". The networks are being built by diverse organizations. Car- 
riers such as the long-distance companies, the Regional Bell Operating Companies, 
independent telephone companies, cellular companies, and competitive access pro- 
viders such as ETC, have provided the major portion of the backbone facilities. The 
ultimate network of networks will also include new technologies from other players 
such as cable operators, electric utilities and providers of personal communications 
services. The government must oversee the speedy integration of these diverse net- 
works and technologies by promulgating the rules under which industry groups 
come together to set the standards necessary for a seamless network of networks. 

COMPETITION WILL NOT THREATEN UNIVERSAL SERVICE 

Competition and universal service are not mutually exclusive policies. That we al- 
ready learned during our ejcperience with long distance competition. Yet once again 
we are hearing, especially from those opposing local competition, that the opening 
of the local telecommunications market will result in stranding thousands of Ameri- 
cans from access to affordable and technologically advanced telecommunications 
services. This is simply not true. Actually, competition will enhance their availabil- 
ity. We can easily a^pt the mechanisms that we have in place for assisting individ- 
uals who cannot reasonably afford the actual cost of their telephone service. 

My company and other members of ALTS have long recognized that with the abil- 
ity to compete in the local maricet comes the responsibility to support universal 
service. We are more than ready to contribute our fair share to the costs of provid- 
ing such support for those individuals who need such assistance. However, we are 
not willing to contribute to the support of a local telephone company that has not 
moved to provide service to its users in the most effit-ient and cost effective manner. 
Therefore, we believe that the best and fairest way to administer murh support is 
through a neutral third party. 

We believe that there will be new companies that will want to compete for the 
provision of services to customers that local telephone companies complain they are 
stuck with as "the carrier of last resort". If the subsidies are equally available to 
all, other carriers may find more efficient and advanced means of providing services 
to these areas, The current system, whereby the existing monopoly provider deter- 
mines the extent of the subsidy and receives the subsidy itself, does not encourage 



222 

the most efficient use of the network. By allowing the consumer to determine the 
service provider, competition and efBciency will prevail. 

CONCLUSION 

The history of telecommunications during the last three decades demonstrates 
conclusively that competition does achieve national objectives better than a regu- 
lated monopoly can do. Both political parties have supported the emergence of tele- 
communications competition, first in customer equipment, and then in long distance 
service. Now it is time to move 8¥riflly and unequivocally to bring the benefits of 
full competition to this as yet monopoly controlled local exdiange market. 

Removing barriers to competition in the local exchange will encourage cost effec- 
tive investment at no cost to ratepayers or taxpayers, support the rapid deployment 
of modem hi^-capacity telecommunications infrastructure at costs appropriate to 
users' ability to pay, and promote universal service. Removing these barriers can be 
accomplished solely by regulators but it is unlikely they will do so in a timely fash- 
ion without Federal oversight. The goals and policy mandates articulated in S. 1086 
ban bring the benefits of local competition to the marketplace. But these objectives 
will only be achieved if the subconamittee, and ultimately the Congress, have the 
courage to move the legislation quickly without significantly altering its design. The 
longer the delay in acnieving competitive local exchange telecommunications serv- 
ices, and the larger the number of caveats and obstacles placed in the way of truly 
opening the mareet as envisioned by the authors of this bill, the greater the drag 
on the U.S. economy and the fewer the options for education, health, and public 
services delivered to ordinary people by telecommunications. 

Entrepreneurship is the bridge between technology and its use by all citizens; the 
policy goals set forth by this Subcommittee ana implemented by the Congress 
through enactment of S. 1086 will encourage this telecommunications entrepreneur- 
ship and bring significant impetus to the development of effective competition in the 
local telecommunications market. 

Senator Inouye. Ms. Easterling. 

STATEMENT OF BARBARA J. EASTERLE^IG, SECRETARY- 
TREASURER, COMMUNICATIONS WORKERS OF AMERICA 

Ms. Easterling. Thank you. 

As secretary-treasurer of the Communications Workers, I rep- 
resent those workers who are employed at AT&T, the regional Bell 
operating companies, and many other telephone companies. 

While understanding your subcommittee's interest in revising the 
Nation's telecommunications policy, my organization is concerned 
about S. 1086 in that the bill, we feel, is perhaps premature, and 
would not lead to a truly competitive marketplace. 

As presently drafted, the bill is an incomplete approach toward 
establishing a telecommimications policy. All of us associated with 
the industry — and I think we heard so this morning — are still try- 
ing to sort out the full set of implications of the mid-August an- 
nouncement that AT&T intends to buy McCaw Cellular. 

We view the AT&T/McCaw deal as a selective return to local 
telephone service from which AT&T departed just short of a decade 
ago. 

Ineluctably, this committee and the Congress must evaluate the 
merits of continued MFJ restrictions on the Bell operating compa- 
nies. For 20 years the Congress has struggled with the ever devel- 
oping need for a policy to govern this important industry. 

Bills have been introduced in every congress since 1973, with the 
necessary consensus always unattainable. Currently, several public 
bodies are involved in addressing telecommunications policy issues, 
including the two Houses of Congress, the FCC, the NTIA, and the 
OTA. 



223 

And this is in addition to the Department of State, the Depart- 
ment of Justice, the Federal courts, and, of course, the States, 
which preserve tneir own regulatory role as well. 

We would strongly recommend that before any new legislative ef- 
forts are begun, the administration, the Congress, and the industry 
would establish a broadly based study commission to agree on new 
policy directions. 

Senator Breaux proposed such a study group to make an overall 
policy recommendation. And we are encouraged that the NTIA has 
established its own working group to draft the position paper on 
telecommunications policy issues for presentation to the Congress. 

S. 1086, in our view, can be viewed as giving undeserved protec- 
tion to competitors of local exchange telephone companies. Any leg- 
islation should merely protect the process of competition, not aim 
at guaranteeing market results. 

We do not believe that it is the job of Government to promote 
competition, as some favoring the bill have publicly stated. Promot- 
ing competition is the same as creating competition. Government's 
role must merely be to protect the processes against abuses. 

Since the circuit court recently ruled that all carriers must file 
the tariffs required under present rules, we would view enactment 
of section 229(h) as decidedly partial to some providers, at the siz- 
able expense of others. Tariff forbearance is a poor idea, as has now 
in 1993 been decided by the circuit court of appeals. 

We believe an unintended side effect of the legislation, and this, 
of course, is my major reason for being here, would be a sizable re- 
duction in emplo3rment in local exchange telephone companies, 
which would remain the providers of last resort. The new competi- 
tors would be free to serve their niche markets, taking only the lu- 
crative businesses. 

State regulators, meeting in July at the NARUC summer con- 
ference, devoted considerable time to debating the bill, and the 
need to ensure adequate support within the local rate structure to 
continue universal service. 

One key consideration of NARUC continues to be the viability of 
the universal service fund, which is imlikely to receive the proper 
support, unless your legislation is clear and strong in its policy 
mandates. 

As matters have unfolded over the last quarter century, the com- 
petition has come in thin wedges, driven in by companies trying to 
serve only the niche markets. 

The overall question of the proper contribution toward the fixed 
costs of maintaining a first-rate core network, available univer- 
sally, has yet to be addressed by the Congress over the last two 
decades. 

Section 5 of the bill appears to require all telecommunications 
carriers to make contributions toward universal service in the 
present of a competitive environment. 

But our analysis does not show that section with enough clarity 
that each niche competitor would be reached for equitable assess- 
ments of funds to help pay the costs of local exchange service. 

Where we may have differences with the subcommittee is the be- 
lief that this legislation will promote investment in new technology, 
and at the same time lower rates. 



224 

CWA supports legislation that would allow the telephone compa- 
nies to enter the cable business, since cable companies have re- 
cently made the decisive move into selective and lucrative offerings 
of local exchange services. 

The telco-came provisions of section 8 of the bill are unduly re- 
strictive, in CWA^ view. The union instead supports H.R. 1054, 
legislation offered by Representatives Rick Boucher and Mike 
Oxley, as a more appropriate means of regulating the enterprise. 

We are convinced that the restrictions keeping telephone compa- 
nies from providing cable services here in the tJnited States have 
encouraged those companies to invest billions of dollars in foreign 
enterprise. 

The telephone compaiw should not be required to establish sepa- 
rate subsidiaries for ofi^ring cable services. Such a requirement 
would in our view become anticompetitive, in that it would unduly 
increase the transaction costs of the telephone companies and their 
competitors, at the same time, would not be similarly burdened. 

Finally, we agree with many of the comments that were made 
this morning. In fact, we found that the questions by the Senators 
were just as telling as the answers by the panel. 

We, in fact, feel that a competitive arena would be a good one, 
one in which — as I think it was Senator Breaux who said — we open 
up competition 100 percent to all the comers, and we provide the 
rules that all will operate under, and it will be a single set of rules. 

And to that end, CWA looks forward to working with the sub- 
committee and the Senate in this undertaking. 

Thank you. 

Senator INOUYE. Thank you very much. 

[The prepared statement of Ms. Easterling follows:] 

Prepared Statement of Barbara J. Easterling 

While understanding your Subcommittee's interest in revising the nation's tele- 
communications policy, my organization's assessment of S. 1086 is that the bill is 
premature and will not lead to a truly competitive marketplace. In our view, the 
Congress and several Administrations have to date attempted to undertake only 
partial steps, while far more is needed. As presently drafted, we oppose S. 1086, as 
another incomplete approach toward establishing a telecommunications policy. 

One of the major ongoing debates in our country has been to decide and set our 
telecommunications policy, when the American Telephone and Telegraph Company 
(AT&T) broke up in 1984, in the largest business transaction in the history of the 
world, many new and unforeseen problems and issues emerged. 

All of us in the industry are trying to sort out the full set of implications of the 
mid-August announcement that AT&T intends to buv out McCaw Cellular, the na- 
tion's leading wireless enterprise. Any move toward legislation now requires an in- 
depth examination of issues emerging from this multi-billion-dollar transaction. We 
view the AT&T-McCaw deal as a selective return to local telephone service, from 
which AT&T departed iust short of a decade ago. Ineluctably this Committee and 
the Congress must evaluate the merits of contmued MFJ restrictions on the Bell 
Operating Companies. 

For 20 years the Congress has struggled with the ever-developing need for a pol- 
icy to govern this important industry. Bills have been introducea in every Congress 
since 1973, with the necessary consensus always unattainable. The process of legis- 
lating a new policy has become extremely complex at a time when the Congress 
must devote its major energies to other matters presenting themselves as more ur- 
gent. . . 

Currently, several public bodies are involved in addressing telecommunications 
policy issues, including the two Houses of Congress, the Federal Communications 
Commission, the National Telecommunications and Information Administration in 
the Department of Commerce, the Congress' Office of Technology Assessment and 
the Department of State. By enforcing anti-trust law, the Department of Justice and 



225 

Federal courts oversee the AT&T and GTE cases, in which telecommunications mat- 
ters are at the core. Finally, the States preserve their own regulatory role. 

In 1967-68, there existed the President's Task Force on Communications Policy, 
chaired by Eiigene V. Rostow, Under Secretary of State for Political Affairs. The 
Rostow Task Force's final report became a blueprint for new policy directions, in- 
cluding the injection of competition into the telecommunications industry. That Task 
Force was responding to President Johnson's message keyed to the emerging use of 
satellites for international and possible domestic use, ana developments m common 
carrier, broadcasting and cable television enterprises. 

We would strongly recommend that before any new legislative efforts are begun, 
the Administration, the Congress and industry establish a broadly based study com- 
mission to agree on new policy directions, modeled on President Johnson's task 
force. Senator John Breaux recently has aptly proposed such a study group to make 
an overall policy recommendation. 

We are encouraged that NTIA has established its own working ^roup to draft a 
position paper on telecommunications policy issues, for presentation to the Con- 
gress. From the agency's announcement, we see a commendable attempt to give a 
comprehensive coverage of the many complex sub-issues facing government as it 
regulates the teleconununications industry for the good of all interests in the United 
States. We strongly support NTIA's efforts to get the policy dialogue moving for- 
ward. 

S. 1086, in our view, can be viewed as giving undeserved protection to competitors 
of local exchange telephone companies; any legislation should merely protect the 
process of competition, not aim at guaranteeing market results. 

We do not believe it is the job of government to "promote" competition, as some 
favoring S. 1086 have publicly stated. Promoting competition is the same as creating 
competition. Government's role must merely be to protect the processes against 
abuses. We strongly advocate the Subcommittee strike the bill's proposed subsection 
229(h), which deals with "Regulatory Flexibility for Competitive Services." Since the 
District Court on July 7 ruled that all carriers must file the tariffs required under 
present law, we would view enactment of 229(h) as decided Iv partial to some pro- 
viders, at the sizable expense of others. Tariff forbearance is a poor idea, as has now 
in 1993 been decided by the Circuit Court of Appeals. Since the Supreme Court de- 
clined to review that appellate decision, we and many others in the industry contend 
that tariffing requirements are sound law and policy. 

CWA views tne August 16 Commission decision in CC Docket 93-36, on the 
"streamlined" tariffing requirements for "non-dominant" carriers, as yet another 
anti-competitive action, contravening Section 203 of the Communications Act. The 
Commission erred in its old "forbearance" policv, begun in 1979, and appears bent 
on continuing policies which favor the lai^ge and powerful rivals of AT&T^ The Con- 
gress should press the Commission for consistency in tariffing rules. 

We believe an unintended side effect of your legislation would be a sizable reduc- 
tion in employment in local exchange telephone companies, which would remmn the 
"providers of last resort." The new competitors would be free to serve "niche" mar- 
kets, taking only the lucrative business. In revising telecommunications policy the 
Congress needs to examine the fuU range of implications of comjpetition, instead of 
findmg competition a goal in and of itself. In the last decade of "competition," we 
have seen local telephone rates more than double; we have yet to detect the unquali- 
fied success of competitive offerings, especially in the case of ordinary residential 
telephone users. 

State regulators meeting in July at the NARUC summer conference devoted con- 
siderable time debating S. 1086 and the need to ensure adequate support within the 
local rate structures to continue universal service, while the NARUC delegates then 
were unable to take a unified position on S. 1086, it is clear they perceived the need 
for extensive work to make the legislation serve its aim of preserving universal serv- 
ice. One key consideration of NARUC continues to be the viability of the Universal 
Service Fund, which is unlikely to receive proper support unless your legislation is 
clear and strong in its policy mandates. The competitive access providers have been 
clear in their opposition to paying their shares of local exchange costs. Any short- 
falls of needed local revenues will be made up by residential and small-business 
users — who will wind up paying billions of dollars to subsidize large business users. 
This situation will offer almost an exact replay of the network access charge of a 
decade ago, a means by which billions of dollars of interstate revenues were shifted 
onto the bills and backs of small users. We all were drowned in rhetoric of "bypass 
blackmaU" in late 1983. Those of us opposed to the access charge at that time cor- 
rectly noted that the access charge proposal would lead to "bypass," which is in fact 
happening now. Let the Congress not make matters any worse. Let the Congress 
listen this time. 



226 

In adopting telecommunications policy legislation, our key recommendation is that 
the Congress squarely face the issue of competition. As matters have unfolded over 
the last quarter-century, the "competition" has come as thin "wedges" driven in by 
companies trying to serve only "mche" markets. The overall question of the proper 
contribution toward the fixed costs of maintaining a first-rate core network, avail- 
able universally, has yet to be addressed by the Congress over the last two decades. 

Section 5 of S. 1086 appears to require all telecommunications carriers to make 
contributions toward universal service in the presence of a competitive environment; 
our analysis of Section 5 does not show with enough clarity that each "niche" com- 
petitor would be reached for ecpiitable assessments of funds to help pay the costs 
of local exchange service, which by its very nature is capital- and labor-intensive. 
Not to address this point clearly in legislation is to invite litigation as to the intent 
of Congress on subsidies within the rate structure. 

If in fact the issue is competition, let the terms of the debate be fully defined and 
widely understood, who competes with whom and the equity or inequity of terms 
of competition need a full airing by the Congress and the appropriate Federal and 
State agencies, to ensure a fair process. We aCTee with Senator Inouye that "The 
crucial word is competition," as he noted in the June 9 press conference on the legis- 
lation, where we may have differences with the Senator are the beliefs chat this leg- 
islation will promote investment in new technology and at the same time lower 

Whose rates would decrease? Certainly not the rates of the average residential 
user, whose basic dial-tone charges went up more than 100 percent in only the four- 
year period starting in early 1982. To date, no entity has shown a credible scintilla 
of interest in serving the local residentieil and small-user maiket for telephone serv- 
ice. We hope the Congress will not lose sight of the present universality of service. 

Many aspects of S. 1086 already are within the powers of the Federal Commu- 
nications Commission. Other aspects are covered by the 1982 Modification of Final 

Judgment. i.i rmr 

CWA supports legislation to eillow telephone companies to enter the cable TV 
business, since cable companies have recently made decisive moves into selective 
and lucrative offerings of local exchange services. The telco-cable provisions of Sec- 
tion 8 of S. 1086 are unduly restrictive, in CWA's view. The union supports HJR. 
1504, legislation offered by Representatives Rick Boucher and Mike uxley, as a 
more appropriate means of regulating the enterprise. We are convinced that the re- 
strictions keeping telephone companies from providing cable services here in the 
United States have encouraged those companies to invest billions of dollars in for- 
eign enterprises. We beUeve public policies encouraging investment in the United 
States should be the very first priority. 

However, on the cable-telco provisions of both S. 1086 and H.R. 1504, CWA 
strongly advocates a major amendment. The telephone companies should not be re- 
quired to establish separate subsidiaries for ofTering cable services. Such a require- 
ment would, in our view, become anti-competitive in that it would unduly increase 
the "transaction costs" of telephone companies. Their competitors at the same time 
would not be similarly burdened with those added duplicative transaction costs, 
which would become a major disincentive to time competition. 

CWA would most strongly suggest the Subcommittee carefully examine the Au- 
gust 24 ruling of the U.S. district Court in Alexandria in the case brought by Bell 
Atlantic, challenging the 1984 cable communications policy legislation. Section 8 of 
your bill, S. 1086, would impose numerous conditions on the Bell and other local 
exchange carriers. Some conditions to be imposed by Section 8 may not be consistent 
with the District Court's decision. In the event Bell Atlantic begins to move forward 
with its plans to enter the cable TV business, the Congress may be a placing itself 
in the awkward position of attempting to legislate a company out of a legitimate 
enterprise. We believe the Congress instead should concentrate on a single and con- 
sistent policy of competition. All providers should be under the same rules, to in- 
clude tarifT-filings and justifications. 

In conclusion, the position of CWA is that the Congress should make numerous 
extensive amendments to S. 1086 to open the competitive arena to all comers, pro- 
vided all operate under a single set of rules. CWA looks forward to working with 
your Subcommittee and the Senate in this undertaking. 

Senator Inouye. Ms. Preston. 

STATEMENT OF PAULA SMITH PRESTON, VICE PRESIDENT OF 
ADMINISTRATION, HELLO, INC. 

Ms. Preston. Thank you, Mr, Chairman. 



227 

I am Paula Preston of Hello, Inc., a telephone answering service, 
located in Richmond, VA. I am appearing on behalf of my company 
and my fellow members of the Association of Telemessaging Serv- 
ices International, known as ATSI. 

ATSI is the national trade association representing the voice 
mail and live answering industry. The members are virtually all 
small businesses. 

The majority are woman-owned. In fact, my great-grandmother, 
Margaret Redmond Smith, was one of the pioneers in the industry, 
having founded our company as a doctor's answering service in 
1923. 

Today, because of the regulatory bias created by telephone com- 
panies' anticompetitive access to and use of customer proprietary 
network information, or CPNI, as well as joint marketing and 
cross-subsidization, the future does not look so bright for our indus- 
try, or for the American consumer of telemessaging services. 

These three advantages, CPNI, cross-subsidization, and joint bill- 
ing, which are not available to me as an independent enhanced 
service provider, severely hamper our industry's ability to provide 
affordable voice messaging services to the American public. 

How does the telephone companies' use of CPNI create an unfair- 
ness in the marketplace, and cause the American consumer to be 
the real loser? 

Telephone companies can use CPNI to identify potential cus- 
tomers for voice mail or other imregulated services, such as sub- 
scribers moving into the area, or adding service locations, before 
we, as competitors, are aware of them. 

Telephone companies can use CPNI to prepare highly effective 
marketing presentations, based on usage information, such as 
numbers of missed or blocked calls. This information is unavailable 
to me. Is it verifiable to the consumer? 

Perhaps most frustrating, our supplier is, first and foremost, our 
competitor. Because of that, telephone companies can identify the 
customers using competing vendor services by matching up the 
CPNI of vendors and customers. 

The telephone companies want you to believe that these exam- 
ples are merely abstract "what-ifs." We have found that this is not 
the case. 

ATSI has compiled volumes of incidents where proprietary infor- 
mation has been used in an anticompetitive fashion to discriminate 
against our industry, and thwart the American public's freedom of 

choice. /-.T^xTT 

One of the many examples of such use and abuse of CPNI oc- 
curred when my father, Edward L. Smith, Sr., called C&P Tele- 
phone Co. to have delay, call forwarding service on his home phone. 
He was asked what it was to be used for, and he replied that he 
wanted to have his calls answered by Hello, Inc. He was told that 
he could not use it with Hello, Inc., specifically, and that it could 
only be used for C&Fs voice mailboxes. 

It is impossible to calculate how many times C&P Telephone may 
have used this marketing strategy. It is equally impossible to know 
how much business my company has lost to C&P Telephone, afler 
we have marketed our services, and customers who are ready to 



228 

sign on are told by the telephone company that it cannot be done, 
except their way. 

I do know this: They win. We and the American consumers lose 
every time. 

How do the telephone companies take advantage of their struc- 
ture? By not providing unregulated services such as voice mail to 
a separate subsidiary. The telephone companies can add their 
charges for voice mail onto the basic service mail for virtually no 
cost. 

In many States, the charge for unregulated services, such as 
voice mail, combined with the basic telephone subscription charge, 
the consumer is charged one lump sum called monthly service. 

The customer is conveniently never again reminded of how much 
the enhanced service costs, except in some areas where they have 
an annual itemization. 

In fact, the telephone company may increase the charge for the 
unregulated services as they deem necessary. Because the charge 
is not itemized, the American consumer is not provided with the in- 
formation necessary to properly evaluate the cost or worth of the 
service, nor is the consumer given any incentive to privately price 
comparable services, and decide what is best for his given situa- 
tion. 

The telephone companies are also not averse to undeipricing 
their voice mail services in an attempt to price us out as their com- 
petition. 

In fact, in May 1992, the Georgia Public Service Commission 
found evidence that Southern Bell could not possibly offer its voice 
mail service, which is known as Memory Call, for the price that it 
charged. It was offered at far below cost. We cannot compete with 
these rampant abuses. 

Such lack of fair competition, as I have outlined, will return tele- 
communications in America back to the dark ages, before the 
breakup of the AT&T monopoly. Ultimately, the American 
consumer will once again be the loser. 

Thank you for the opportunity to testify. ATSI welcomes this op- 
portunity to work with the committee in securing enactments of 
the safeguards contained in S. 1086. 

On behalf of my fellow members in the telemessaging industry, 
I urge that the joint marketing and separate subsidiary rules be 
expanded to apply to the telephone answering voice mail industry. 

Thank you. 

Senator Inouye. Thank you very much, Ms. Preston. 

[The prepared statement of Ms. Preston follows:] 

Prepared Statement of Paula StAnu Preston 

My name is Paula Smith Preston, of Hello, Inc., a telephone answering service, 
located in Richmond, Virginia. I am appearing on behalf of my company and my fel- 
low members of the Association of Telemessaging Services International known as 
ATSI. 

ATSI is the national trade Eissociation representing the voice mail and live an- 
swering industry. The members are virtually all small businesses. The majority are 
woman-owned. In fact my great-grandmother, Marearet Redmond Smith, was one 
of the first In the telemessEiging industry, having found our company as a doctors' 
answering service in 1923. 

Today, because of the regulatoiy bias created by telephone companies* anti- 
competitive access to, and use of, customer proprietary network information 



229 

(CPNI) — as well as ioint marketing and cross-subsidization the fiiture does not look 
so bright for our industry or for the American consumer of telemessaging services. 
These 3 advantages CPNI — crosssubsidization, and joint billing — which are not 
available to me as an independent enhanced service provider, severely hamper our 
industry's ability to provide affordable voice messaging services to the American 
public. 

How does the telephone companies' use of CPNI create unfairness in the market 
place and cause the American consumer to be the real loser in receiving advanced 
customized telemessaging services? 

• Telephone companies can use CPNI to identify potential customers for voice 
mail or other unregulated services, such as subscribers moving into the area or add- 
ing service locations, before we, as competitors, are aware of them; 

• Telephone companies can use CPNI to prepare highly effective marketing pres- 
entations based on usage information (such as number of missed or blocked calls). 
This information is unavailable to me. Is it verifiable to the consumer? 

• And perhaps most frustrating, our supplier is, first and foremost, our competi- 
tor. Because of that, telephone companies can identify the customers using compet- 
ing vendor services by matching up the CPNI of vendors and customers. 

The telephone companies want you to believe that these examples are merely ab- 
stract "what ifs." That is not the case. ATSI has compiled volumes of incidents 
where proprietary information has been used in an anticompetitive fashion to dis- 
criminate against our industry and thwart the American public's freedom of choice. 

One of the many examples of such use and abuse of CPNI occurred when my fa- 
ther, Edward L. Smith, Sr., called C&P Telephone Company to have Delay, Call 
Forwarding service on his home phone. He was asked what it was to be used for, 
and he replied that he wanted to nave his calls answered by Hello, Inc. He was told 
that he couldn't use it with Hello, Inc., specifically, and that it could only be used 
for C&Ps voice mailboxes! 

It is impossible to calculate how many times C&P Telephone may have used this 
marketing strategy. It is equally impossible to know how much business Hello, Inc. 
has lost to C&P Telephone after Hello has marketed its services, and customers who 
are ready to sign-on are told by the telephone company that it can't be done — except 
their way! 

I do know this: They win. We and the American consumer loses. Every time. 

How do the telephone companies use joint marketing to create unfair advanta.ge 
in the marketplace and cause the American consumer to be the real loser in receiv- 
ing advanced telemessaging services? Through Computer ID, the FCC has specifi- 
caUy allowed the telephone company to use its regulated service sales personnel to 
seU competitive services. With few limitations, a new phone subscriber can be sold 
voice mail at the same time he is requesting basic phone service. This is before he 
as a consumer even knows there are competitors offering the same or better service 
to meet his needs Furthermore, these same phone company personnel can sell voice 
mail when subscribers call the telephone company for any reason — new service, re- 
pairs, or most unfairly, when they order the services link — call forwarding — which 
they need to receive voice mail service from independent providers. 

How do the telephone companies take advantage of their structure? By not provid- 
ing unregulated services such as voice mail through a separate subsidy. The tele- 
phone companies can add their charges for voice mail on the basic service bill for 
virtually no cost. In many states, the chaise for unregulated services such as voice 
mail is combined with the basic telephone subscription charge. The consumer is sim- 
ply charged one lump sum and it is called "monthly service". The customer is con- 
veniently never again reminded of how much an enhanced service costs except in 
some areas where there is an annual itemization. In fact, the telephone company 
may increase the charge for the unregulated service as they deem necessary. Be- 
cause the charge is not itemized, the American consumer is not provided with the 
information necessary to properly evaluate the cost — or worth — of the service. Nor 
is the consumer given any incentive to privately price comparable services and de- 
cide which is best for his given situation. 

TTie telephone companies are not averse to underpricing their voice mail services 
in an attempt to "price us out" as their competition. In fact, in May 1992 the Geor- 
gia Public Service Commission found evidence that Southern Bell could not possibly 
offer its voice mail, Memory Call, for the price it charged. It was offered at far below 
cost. We cannot compete with these rampant abuses. This is not a level playing 
field. 

Such lack of fair competition as I have outlined in my testimony, will return tele- 
communications in America back to the daik days before the breakup of the AT&T 
monopoly. Ultimately, the American consumer will once again be the loser. 



230 

Thank you for the opportunity to testiiy. ATSI welcomes this opportunity to work 
with the committee in securing enactments of safeguards contained in S. 1086. On 
behalf of my fellow members in the telemessaging industry, I urge that the joint 
mariceting and separate subsidy rules be expanded to apply to the telephone an- 
swering voice mail industry. 

Thank you. 

Senator Inouye. The word "competition" has been used by every 
witness many, many times. And I will take the suggestion of the 
author, Senator Danforth, very seriously. 

I think it has become obvious that the crux of the whole measure 
may lie in the definition of the word "competition." Mr. Lasher has 
suggested that the sudden onslaught of competition may be dev- 
astating, that there must be some time to prepare oneself for com- 
petition. I believe Ms. Easterling has said that the definition in 
this bill is unclear. 

So, all of you have testified on the word "competition." I would 
suggest very strongly that you come forth with your definitions of 
what competition should mean, because, otherwise, we will hear 
from RBOC's at AT&T, and they may set the standard and defini- 
tion. 

And I listened — Mr, Ray, I was very much impressed, because up 
until now we have been told that private industry can do the job 
better than Grovernment, and apparently it is not so in your part 
of Kentucky. Congratulations. 

Mr. Ray. Thank you. 

Senator Inouye. I did not quite get the number. You said that 
in one business you can do it for less than $50, when private indus- 
try would charge over $1,000; is that right? 

Mr. Ray. Yes. On the communitywide local area network that we 
have, we have established a 2-megabit-per-second network that 
anyone with a home computer, or other businesses that want to tie 
their networks to create virtual networks, and once the highway is 
constructed, the addition of these services, the incremental cost is 
fairly insignificant. 

I do not pretend to know why the phone company charges for 
these services the way they do. I have my suspicions. But I know 
that, a T-1 — there is a tariff for T-1, which is IVz megabytes per 
second in Kentucky, and it is in the $1,200 range. 

And we charge $19.95 for it, and make probably more margin on 
that service than we do on cable TV or electricity, for that matter. 

Senator Inouye. Mr. Opperman, we have been advised that the 
RBOC's has been discussing your support of their entry into long 
distance, and v/ith your support they will support your safeguards 
for electronic publishing. What is your interest in long distance? 

Mr. Opperman. Well, it is really historic, in this sense, that 
when the monopoly was broken up, as we all well know, long-dis- 
tance charges dropped by approximately 40 percent in a very short 
period of time. That pretty much unleashed our product, 
WESTLAW, and it imleashed much of our competitors, the elec- 
tronic product. 

We have an interest in seeing competition at all levels. And our 
interest in long lines issue is merely that as we move to a competi- 
tive model, we see the need for some transition rules, but not tran- 
sition rules forever. 



231 

If I can explain that, it just seems to us that the same great ex- 
perience we have had so far in the last 12 years will be replicated 
many times over if we can follow that same process as we break 
up the local bottleneck monopoly. 

Now, obviously, our interest in breaking up the local bottleneck 
monopoly is the same as the one we had m breaking up the long- 
distance monopoly. We are a customer. We cannot compete with 
these people. We are a customer. 

And we get better service and cheaper prices when the long-dis- 
tance monopoly broke up, and we are pretty dam sure that we are 
going to get lower prices and better service when the local bottle- 
neck gets broken up. That is really our interest. 

Senator Inouye. Thank you. 

Mr. Kimmelman, you touched upon universal service. This is an- 
other area where definition may be very important. What is your 
definition of "universal service"? 

Mr. Kimmelman. Mr. Chairman, I do not think there is any one 
definition. I think that it evolved over time. But I would treat it 
from this perspective: I think the American people have come to 
have an expectation that local telephone service is a necessity for 
everyday life, dealing with family, friends, business contacts. 

And it has been one of the best bargains that we have had in 
our economy. The real price of local phone service has actually fall- 
en 60 percent since the 1930's. 

As I look at the desire to move to competition, I believe the 
American public will say, "What is in it for me? What will I get?" 

Well, there are a lot of promises about new services and where 
we are going. But I think the one thing that will seem anomalous, 
if not totally contradictory, is that the price of what they view as 
a necessity actually goes up. 

So, my suggestion, on a practical level, based on how the public 
seems to respond to their needs, is to put in place a directive from 
Congress to the regulatory bodies to preserve that pricing tradition. 

We need a new mechanism, when there is not one monopoly car- 
rier, when there are multiple carriers. They will need to all contrib- 
ute, as your legislation calls for. 

I would just urge you to put more detail in, to ensure that if com- 
petition does not exist everywhere, or does not actually drive down 
prices for local phone service, that we have a backdrop, that we 
have guaranteed that we do not have the unintended effect of ac- 
tual price increases. 

Subsumed within that is the traditional problem, raised earlier 
by Senator Stevens and Senator Burns, of rural commiinities hav- 
ing higher costs, the need to spread costs across the entire country, 
low-income households that cannot even afford a phone, persons 
with a disability, who may need special equipment to functionally 
"have" basic phone service. 

I think all that can be subsumed under a new universal service 
mechanism, that is fair to all providers, is not expensive, but pro- 
vides that insurance policy, that local rates will remain at about 
their historical level. 

Senator Inouye. Thank you. 

Mr. Lasher, you expressed some fear that if competition suddenly 
came upon you, it might hurt your business. 



232 

Mr, Lasher. It may be the ambiance of this room, but I guess 
I did not express that the way that I wanted to express it. 

My concern would be that if we just open it up to go-fight-it-out 
competition, that a monopoly would use their monopolistic powers 
to take companies like mine, that are startup companies, and com- 
panies getting into the business, and use their monopolistic power 
to put us out of business. 

So, what we are interested in is the safeguards during a transi- 
tion period, to the point that once competition comes to a point 
where it is real true effective competition, then take off the safe- 
guards and no-holds-barred at that time. But until that takes 
place, there has to be restrictions on a monopoly during the transi- 
tion period. 

Senator Inouye. I will be looking forward to receiving your paper 
on competition. From the top of your head, how long should this 
transition period take? 

Mr. Lasher. I think it might take place at different times m dif- 
ferent places, depending on how fast competition comes into the 
area. 

And there should probably be some type of test that would estab- 
lish when competition exists in that particular service area or geo- 
graphical area. 

Senator Inouye. Thank you. 

Ms. Easterling, you have indicated that we are not quite ready 
to be addressing this type of measure, that we should have a com- 
mission. Listening to the testimony here, do you not think we have 
enough information to proceed? 

Ms. Easterling. My concern has always been — and we have pro- 
moted the commission concept. I think we have done that because 
of the length of time that we have been talking about doing some- 
thing, changing the law that was created in 1934, and not seeing 
anything being done. 

But I think what really drives us is the fact that in this day and 
age we are talking about fiber, and copper, and microwave, and cel- 
lular, and all of those things, and no one has sat down to say, 
"Maybe we ought to devise a telecommunications policy for the 
country," just as we had a pohcy for designing the highways in this 
country. 

Everybody just did not go out and build a highway wherever they 
wanted one. To that extent, we think that there is a lot of waste 
on the building of a lot of the fiber that is being laid, that we are 
going to get to the point where we could not possibly use all the 
fiber that is out there, which is a tremendous cost. 

We think we ought to be looking at the future, smd that some- 
body ought to be looking down the road somewhat to say, "What 
are the highways of the future?" and to help construct that in a 
better fashion, where some heads of different organizations, compa- 
nies, and so forth, could sit down and do it; and not so much in 
an emotional state, where we have fibers, 50 companies coming 
forth to tell you what their needs are in a bill, because this is what 
happened eveiy time. 

And certainly you have seen me up there many times, and we 
all come up here, and we all share with you what our thoughts are 



233 

and what we think should be done to better the telecommuni- 
cations in this country, and nothing ever happens. 

I think sometimes it is because we have created such a lead bal- 
loon that we cannot get it off the ground. So, that is the reason 
that we have been promoting, that the Communications Workers 
have been promoting a telecommunications study, so that we would 
be looking at the overall picture, and also at the future. 

We are concerned about H. We are concerned about the employ- 
ees. No. 1. That is whom we represent. We do not sell any tele- 
phones, or make any money off any of that. Our commodity is the 
employees who are there. And we are concerned about them. 

We are very concerned about the business that is going overseas, 
because the companies are not permitted to perform their work in 
the United States. And we think we ought to be creating those jobs 
in the United States, instead of sending them overseas. 

Those are a lot of our concerns. For that reason, I guess we are 
not ready just to move ahead on a bill that we find some problems 
with, but we are willing to work with the committee. 

I do not want you to think that we are not. We are. And we are 
willing to work with your staff, as we have in the past, to try to 
perhaps devise some amendments that would be acceptable to the 
committee and acceptable to us as well. 

Senator INOUYE. Thank you very much. 

Ms. Preston, you are quite fearful of what the telephone compa- 
nies can do to you. Are the safeguards in this measure sufficient 
to protect your small enterprises? 

Ms. PliESTON. Well, they do not specifically address voice mail. 
I think electronic publishing is addressed. But electronic voice mail 
is not specifically mentioned in the legislation. And that was what, 
really, the thrust of my testimony was. 

We have been in the voice mail business longer than the tele- 
phone company in our area, for some years. They went into it afler 
we were in it, and as well as other competitors we have in the 
area. 

Afler the telephone company came in, the market changed dras- 
tically. That is why we felt that the voice mail industry specifically 
should be mentioned. 

Senator iNOUYE. Thank you. 

I wish to thank all of you for your participation this morning. I 
should tell you that I do have one concern. I am impressed by the 
dynamic and everchanging nature of this industry. 

That being the case, somewhere in the back of my mind there is 
the fear of putting everything in concrete at this stage. If you can 
help me and try to make it sufficiently flexible, so that this meas- 
ure will accommodate, or take into consideration some new tech- 
nology that may come about 30 days from now, because every time 
we have hearings of this nature, something new comes up. 

I remember when I first joined this committee, fiber optics was 
not even mentioned. Now, it is commonplace. So, I hope you can 
do me that service, of taking a careful look at the measure. 

That is my concern, that we might ask for a lot of trouble if we 
put everything in concrete. I hate to come back every 6 months 
with amendments to the measure. 

Senator Danforth. 



234 

Senator Danforth. Mr. Chairman, thank you. 

Thank you to all members of the panel for your very useful testi- 
mony. 

I just have one question, and it is to Mr. Kimmelman. It concerns 
the recent case, the Bell Atlzintic case relating to telephone entry 
into the cable business. 

This legislation deals with that same subject, and this is a sub- 
ject that has been near and dear to the hearts of various Members 
of Congress. Senator Bums, for example, has been very interested 
in the so-called telco entry. 

However, we have endeavored to provide safeguards, and specifi- 
cally what we have done in this legislation is to say that we en- 
courage the telephone companies to get into the cable business, 
provided that it is competitive. 

I me£in, it does not— our view was that it does not create com- 
petition, for a telephone company to buy the cable compsmy. 

Now, it is my understanding that this recent court case, which 
allows telephone company entry into cable, has no limitation what- 
ever on the telephone company simply buying out the cable com- 
pany, and, therefore, expanding a single monopoly into a dual mo- 
nopoly. Do you share my view? 

Mr. Kimmelman. Absolutely, Senator Danforth. In light of that 
court decision, there is no doubt that there is a danger now, with- 
out legislation, that you could take two individual monopolies, a 
cable monopoly and a telephone monopoly, and they could merge 
and create one larger monopoly, whether it is the pnone company 
that buys out the cable company, or vice versa. 

In an area in which we could have competition, that would be 
very unfortunate. So, your legislation clearly would prohibit that, 
ana that is a major step forward. 

There is one addition I would suggest to the legislation. Again, 
it is really a clarification. The question has always oeen: When you 
are investing to expand a telephone system into a video capable 
system, who pays? 

And we have always been concerned that the telephone rate- 
payer, who just buys local phone service, should not have to pay 
for this video investment. Further clarification of that, I think 
would both protect ratepayers and ensure fair competition. 

So, there is no doubt that right now, with that court decision, 
this legislation is even that much more important and necessary to 
promote competition. 

Senator Inouye. Thank you very much. Senator Robb. 

OPENING STATEMENT OF SENATOR ROBB 

Senator Robb. Thank you, Mr. Chairman. I will be very brief. 

Unfortunately, I have had four different important events all oc- 
curring at precisely the same timeframe, and have missed parts of 
the testimony, some of which I had very much looked forward to, 
and I will review it in the record. 

The statement that the chairman just made a minute ago about 
the concern about obsolescence and what you do reminds me of an 
occasion earlier this morning, that I happened to be with the Presi- 
dent and the Vice President, when they were talking about the 
leadtime that the Government takes to order computers. 



235 

I do not know all the specifics, but it seems to me that within 
the private sector it takes a year or so, but within the Government 
I think the timeframe that they referred to was 49 months to get 
a computer. 

And the suggestion was made that by the time the computer ar- 
rived, it was two generations obsolete, m terms of its ability to ful- 
fill whatever needs the ordering entity or Grovemment agency had. 

That clearly is a concern here, in terms of what the Grovemment 
role ought to "be. I was interested, when I was here with the earlier 
panel, when our colleague. Senator Breaux, asked the question, 
which I guess goes to the same point that has been raised by al- 
most everyone, and that is "What would happen if Grovemment 
stepped back altogether? 

Had I had an opportunity to ask a question at that point, I would 
have asked for some explanation, because I think that is the only 
way that those of us who are not technical can address this par- 
ticular question. 

I would ask, not so much in the form of a question for today, but 
for some issues for the record, if you would address the question 
of what kinds of safeguards ought the Grovemment to be most con- 
cerned about, particularly with regard to the timeframe of any 
transitional period. 

Some have argued for the absence of any restrictions to comjpeti- 
tion, however it is defined; others would define "competition" in 
various different ways. 

But it seems to me that if we could have a listing, to the extent 
it is not already explicitly covered in your testimony, some idea of 
the kinds of safeguards, and the kinds of timeframes that would be 
absolutely critical, in your judgment, to the industry or the sector 
of the whole question that you represent, and any discussion of 
how that is going to impact on other players in the industry. 

Again, we had quite an exchange between two folks on the ear- 
lier panel, in terms of having an issue apparently joined, and yet 
not so clearly joined, that it was easy to draw a line, and determine 
exactly what the Grovemment policy should be. 

If you could assist us in that regard, and attempt to, at the same 
time, answer the chairman's question about obsolescence, and 
whether or not anything that we do now is going to inhibit the de- 
velopment of the industry, and the expansion of the competition for 
which we are looking. Something along those lines would be very 
much appreciated. 

Mr. Chairman, this panel has been very patient. They have been 
here for I guess 

Senator INOUYE. Five hours. 

Senator RoBB [continuing]. About 5 hours already. I do not think 
that trying to go through a detailed litany of some of the things 
that I am asking right now would serve any purpose, or generate 
a great deal of goodwill with the panel, or others who are witness- 
ing this particular hearing. 

But I would make that request, and I would conclude by thank- 
ing you and the ranking member for not only putting this piece of 
legislation into force, but for calling this and the previous hearing, 
and offering to hold additional hearings, because I think that after 
the Congress disposes of the whole question of health care reform, 



236 

that the questions that are expHcit and impHcit in this legislation, 
and the related legislation that Senator Danforth referred to a 
minute ago, I believe, are going to be the most important questions 
that this Congress has to wrestle with, and ones which we are 
going to need the most assistance from experts, and people who 
nave technical expertise, as well as those who can advise us with 
regard to policy. 

So, I would say that I think we are on to what is a very impor- 
tant topic, and will be for a long period of time. And I commend 
both the chairman and the ranking member for pursuing it, and I 
look forward to pursuing it with you, and will simply make that re- 
quest. 

And with that, Mr. Chairman, I will yield. 

Senator INOUYE. All right. Thank you very much. 

Before recessing this hearing I would like to announce that we 
will have another hearing, at least one more. We will have to ac- 
commodate the last panel, as I promised. 

In addition to that, we had at least 12 requests to appear from 
very competent and very reliable witnesses, but we could not ac- 
commodate them today. We will most certainly accommodate those 
witnesses. 

I would like to point out to the administration that I would hope 
that the administration will participate in the next hearing. I am 
certain that the administration noted, or should have noted, that 
there is a lot of interest on this committee. 

I can assure you that the authors of this measure have no inten- 
tion to just have hearings. We will report on this measure. We will 
have a markup. And that is why your participation and your assist- 
ance is very important. 

The administration should know that. And that being the case, 
I would hope that they will participate in the process and the delib- 
erations. 

With that, I would like to, on behalf of the committee, thank all 
of you for your patience and your help, and we look forward to 
working with you. 

[Whereupon, at 2 p.m., the hearing was adjourned.] 



APPENDIX 



Prepared Statement of Dean J. Miller, Commissioner, Idaho Public Utilities 

Commission 

Good morning and thank you for giving me the opportunity to comment on the 
Telecommunications Infrastructure Act of 1993, S. 1086. My name is Dean J. (Joe) 
Miller. I am a member of the Idaho Public Utilities Commission and Chair of the 
National Association of Regulatory Utility Commissioners (NARUC) Committee on 
Communications, on whose oehalf I appear today. 

As you may know, the NARUC is a quasi-governmental, non-profit organization 
founded in 1889. Within our membership are the governmental agencies of the fiity 
States, the District of Columbia, Puerto Rico and the Virgin Islands which are en- 
gaged in the regulation of utilities and carriers. Our chief objective is to serve the 
consumer interest by seeking to improve the quality and effectiveness of government 
regulation in America. More specificallv, the NARUC is composed of inter alia. State 
and territorial officials charged with the duty of regulating the telecommunications 
conmion carriers within their respective borders. As such, they have the obligation 
to assure the establishment of such services and facilities as may be required by 
the public convenience and necessity, and the finishing of service at rates that sire 
just and reasonable. 

The NARUC congratulates this committee for beginning a dialogue on issues 
which are becoming increasingly important in the telecommunications industry and 
regulatory field — infrastructure development and competition. The NARUC supports 
your efforts to encourage the development of an advanced telecommunications infra- 
structure and to promote competition, consistent with the preservation of universal 
service, reasonable rates, and maintenance of high quahU' service. 

At our summer meetings this year, the members of NARUC spent a great deal 
of time discussing the proposed legislation, S. 1086. We passed a resolution which 
supports Congressional attention on this important topic but expresses our concerns 
with the bill as drafted. While some state regulators may disagree with some pro- 
posals contained in S. 1086, we all agree that for a successful transition to an ad- 
vanced and competitive telecommunications network, careful monitoring of the in- 
dustiy and cooperation between federal and state regulators is necessary. The 
NARUC resolution has been attached as Appendix A for your review. 

There is much within the bill's stated purposes and findings with which we can 
agree. NARUC generally endorses most of the purposes as stated in Section 3. We 
too, want a wider range of choices in the provision of telecommunications [Sec.3(2)], 
to preserve universal availability of telephone service [Sec.3(5)], and to protect the 
privacy interests of telecommunications users [Sec.3(7)]. State commissions also 
want to encourage investment in the Nation's telecommunications infrastructure 
through the development and deployment of advanced and reliable capabilities and 
services in telecommunications networks [Sec.3 (1) and (6)], and the interconnection 
and interoperability among telecommunications carriers [Sec.3(4)]. 

The knowledge gained from our experience in the day-to-day business of regulat- 
ing the telecommunications industry is consistent with may of the bill's findings. We 
agree that additional development is needed to bring advanced services to certain 
populations [Sec.2(4)], that telecommunications infrastructure development is a 
means of enhancing the quality of life for many areas of the country [Sec.2(l)] and 
that all telecommunications providers should contribute to universal service [Sec.2 
(10)]. Most importantly, we agree that competition must proceed under rules that 
are fair to all telecommunications carriers and protect consumers [Sec.2(9)]. 

While we recognize that in the transition to a regulatory foi-mat based more and 
more on market reliance there may need to be some adjustments in federallstate 
responsibilities, we are greatly concerned about the bill's proposal to accomplish this 
by pre-empting the authority of the states [Sec. 3(3)] to deal with barriers to com- 

{)etition and otherwise [Sec.2(12)] curtailing the ability of the States to respond to 
ocal conditions. Congress should recognize that there is some tension between the 

(237) 



238 

twin goals of universal development and universal competition. As a result, afford- 
able — universal availability should remain a primary concern for policy makers. 

I wUl discuss these concerns further in a moment. First, thought, let me touch 
on activities that have already occurred in the states which both promote infrastruc- 
ture development and encourage maritet-based solutions. 

As state regulators, the members of the NARUC have been working on many of 
the issues contained in S. 1086 on various levels in our respective states. Like you, 
we seek to improve the teleconmiunications technology available to consumers while 
keeping telephone rates affordable for all. State commissions have been using inno- 
vative regulatory approaches to improve infrastructure and move toward a competi- 
tive environment for some time. Many states have facilitated competition in certain 
segments of the telecommunications marketplace and have developed incentive rate- 
making approaches to spur efliciency and improve service. States have used pri- 
marily three methods to achieve the goals of improving the infrastructure: alter- 
native regulation (which relaxes pricing restrictions on new services and encourages 
competition); setting specific timelines for the deployment of advanced technologies; 
or a hybrid policy. 

According to tne draft of NARUC Report on the Status of Competition in Intra- 
state Telecommunications (1993 Update), all multiple LATA states allow intrastate 
interLATA competition, 45 states allow at least partial competition in the 
intraLATA toll market, and 22 states allow at least partial competition in local ex- 
change service. 

Furthermore, 39 state commissions have enacted alternatives to ratef-retum reg- 
ulation, 19 state commissions have acted to allow some form of coUocation, and 36 
states have ONA (requirement to unbundling network functions) tariffs approved or 



Now Deing iniplemented as a result of efforts by the state legislature and Board 
of Regulatory (Jommissioners is "Opportunity New Jersey." This plan requires 
broadband service availability everywhere in the state within 18 years. The phone 
company is required to accelerate deployment of four technologies: advanced intel- 
ligent network; narrowband digital services; wideband digital services; and 
broadband digital services. Protection of universal service is aided through a cap of 
25 cent per month price increases on residential services in any one year. 

Tennessee has developed a 10 year master plan, "FYI Tennessee , in an effort to 
modernize the state's telecommunications network. Regulatory reform proposals in- 
clude incentive sharing and the flexible pricing of services. Small LECs, those under 
70,000 access Unes, have their choice of regulation plans. The Master Plan for Tech- 
nology Deployment accelerates deployment of 557 technology, ISDN, and broadband 
capaoilities. Specific dates for deployment are established for urban, suburban, and 
rural areas. 

Pennsylvania is another state which recently signed into law legislation allowing 
deregulation of competitive services while retaining price-based regulation of non- 
competitive services. The PUC is prohibited from rate regulating competitive serv- 
ices, but retains the flexibility to shift services between competitive and non-com- 
petitive classifications as appropriate, according to established criteria. In exchange 
for alternative regulation, telephone companies must commit to deploying 
broadband capabilities to all customers by the end of 2015. 

Long considered a leader in telecommunications regulation, the New York PSC 
was the first regulatory body, federal or state, to authorize competition in the provi- 
sion of special access and switched access transport services. In addition, the PSC 
recently permitted competition for end-user access services, requiring New York 
Telephone to unbundle its residential and business loops. In taking these actions 
the PSC has continued to ensure universal access to basic services, reasonable rates, 
and maintenance of quality service through a comprehensive lifeline program and 
careful monitoring during the transition to a more competitive industry. 

Most recently, the Oregon PUC was authorized to allow local exchange competi- 
tion by service or by geographic area if competition can be found to serve the public 
interest. The law allows the PUC to approve competition in all or part of a local 
exchange and to establish rules and standards for the local exchange competitors. 
Small telephone companies, those under 15,000 access lines, are exempt from com- 
petition until 1998. In addition, the Oregon PUC currently completed a docket on 
unbundling and interconnection issues. The results allow a competitor to purchase 
individual components of the network and allow customers of a LBC to interconnect 
to the local network in a variety of ways. 

Because the removal of regulatory barriers does not guarantee meaniagful com- 
petition, states have been transitioning to competition with care given to the poten- 
tial impacts on universal service and service quality issues. One trend among the 
states IS to reduce regulation on services as they become increasingly competitive. 



239 

Another is to delay competition mandates in rural areas. Rursd areas, in most state 
plans, are expected to achieve the same level of technology as urban areas but are 

S'ven an extended time period. This type of consideration allows regulators to learn 
om urban markets and make modifications for rural areas. States have found their 
actions make the transition to competition more effective while giving consumers 
better protection. 

Let me now address our concerns regarding this legislation. They fall into four 
categories. 

PREEMPTIVE REMOVAL OF ENTRY BARRIERS 

The NARUC strongly questions the bill's fmdings that "removal of all state and 
local barriers to entry * * * are essential to the development of a national inter- 
state telecommunications infrastructure" [Sec. 2(12)] along with the addition of a 
new section to the Communications Act prohibiting any limitation on the "ability 
to of any entity to provide interstate or intrastate telecommunications services" [Sec 
.229(a)]. 

There are, no doubt, many markets in which competitive entry would have the 
beneficial effect of lowering prices, expanding choices for consumers, and increasing 
efficiency on the part of the incumbent. We are fearful, though, that rural or less- 
dense markets may not be capable of sustaining robust competition and that com- 
petitive entry would result only in selective by-pass by a few Isirge customers while 
remaining customers are saddled with the lost revenue requirement. 

Rather than the virtually immediate and blanket prohibition against entry bar- 
riers contained in the bill you might consider one of two alternative approaches. The 
first would be to limit the application of Sec. 299(a) to statutorily defined markets 
in which competition is likely to be effective. This, we recognize, would present a 
challenge in drafling statutory language that would correctly define those markets. 
A second and preferable approach would be to delegate to the state commissions the 
responsibility to make case-by-case findings regarding the advisability of removing 
entry bsirriers for specific markets. 

This sort of delegation is not without precedent. In both the Public Utility Regu- 
latory PoUcy Act (PURPA) and the Energy Policy Act of 1992, (EPACT) Congress 
established broad federal policy preferences but delegated to the states responsibil- 
ity for implementing those preferences, taking into account local conditions and cir- 
cumstances. PURPA is widely viewed as a success, and as my summary of activities 
already occurring in the states with respect to telecommunications incficates, states 
can be expected to act responsibly in the telecommunications area as well. 

We also suggest amending this section to make it clear that conditions of entry, 
such as revenue requirements for telephone relay service (TRS) or telephone service 
cut off rules, are not considered barriers to entry or limitations on the ability to pro- 
vide service. These conditions ensure a basic level of service for all consumers and 
ensure that consumer rights are not overlooked. Such conditions of entry would be 
applied equally to all providers of telecommunications service. 

RE-DEFINING THE FEDERAL/STATE RELATIONSfflP 

While NARUC can agree that national policy is needed in telecommunications 
[sec. 2(11)] and that this wiU carry with it some re-definition of Federal and State 
responsibilities [sec. 2(13)], we have several concerns in this area. 

S. 1086 provides a unique opportunity to clarify the role of state and FCC officials 
during this transition to competition and to recognize that the states have the ex- 
pertise in oversight of the local telecommunications services. The bill offers the op- 
f>ortunity to explore ideas for strengthening federallstate coordination, and estab- 
ishing a new framework that preserves state policy prerogatives while recognizing 
the need for greater consistency as new technologies and markets evolve. 

We believe, however, that in its current form the bill tends simply to shifl respon- 
sibilities away from the states and to concentrate them at the FCC rather than en- 
couraging coordinated federal/state actions. Examples of shifted responsibilities in- 
clude: the federalization of entry regulations [Sec. 229(a)]; preemption of inter- 
connection rules that are inconsistent with federal rules [Sec. 229(c)]; federalization 
of local number portability [Sec. 229(0]; preemption of state rural safeguard pro- 
grams the FCC finds to be inadequate [Sec. 230]; federal authority to define services 
subject to price flexibility [Sec. 229 ChX2)]; and the elimination of state authority 
over information service regulation [Sec .223]. 

This concentration of authorities at the FCC raises two types of concerns. The 
first is administrative. As implementation of the Cable Act of 1992 illustrates, budg- 
et and staff limitations place a very real limit on the ability of the Commission to 



240 

implement even well-intentioned legislation. There is no reason to think it will be 
an£ different with S. 1086. 

The second has to do with institutional capabilities. Even if the FCC doubled in 
size, its ability to respond to local concerns would be less than currently exists in 
the states. State commissions are the ones on the front lines, the ones who receive 
calls about poor or unavailable service or high cost of service. Because we hear from 
the consumers, because state commissions wiU see firsthand the emergence of com- 
petition, and because we are sensitive to the infrastructure needs of the state, state 
commissions must retain authority over intrastate telecommunications. Even as 
competition emerges, the state commissions need to retain authority to resolve sub- 
scriber complaints, intercompany disputes and other administrative matters. Most 
importantly. States need to retain their authority to re-regulate if quality, availabil- 
ity, or terms and conditions of deregulated service deteriorate or if competition does 
not develop. State regulatory authority will enhance, not impede the sound and 
smooth transition to competition. 

Finally, the NARUC supports enhanced processes to strengthen federaUstate co- 
ordination. The 1934 Communications Act recognized that there may be disputes be- 
tween these policy makers and provided for the Federal/State Joint Board process, 
a statutorily-sanctioned forum of representatives from the FCC and selected States, 
all dedicated to resolving territorial concerns. We believe this process, with a panel 
of experts working toward solutions, is far superior to granting one jurisdiction pre- 
emptory power over the other. 

PRESERVING UNIVERSAL SERVICE 

NARUC endorses the bill's stated goal of ensuring the universal availability of 
telephone service [Sec.3(5)], although we note with some dismay the bUl's failure to 
make a specific finding that preservation of universal service is in the public inter- 
est, giving rise to the fear that this may be a lower priority than some of the bUl's 
other goals. 

Our concern here is heightened by the complicated and ambiguous interplay be- 
tween Section 229(d) — Universal Service, Section 229(h) — Regulatory Flexibility, 
Section 230(a) — Rural Markets and Noncompetitive Markets, Section 229(a) — Re- 
moval of Barriers to Entry and Section 229(c)(1) Obligations of Teleconmiunications 
Carriers. 

One hand, Section 229(d) requires that States "in combination with the Commis- 
sion, shall ensure the preservation and advancement of universal service." This bold 
directive, however, is unaccompanied by any guidance as to its attainment. 

Notwithstanding this general directive, otner provisions of the legislation take 
away the tools traditionally used to achieve this goal. For example, it can be argued 
that a necessary corollary of freedom of entry is a freedom of exit thus raising 
doubts about the ability of states to enforce carrier of last resort obligations. And, 
while we recognize that Section 229(h), dealing with regulatory flexibility is permis- 
sive, not mandatory, there is some tension between price flexibility and preservation 
of averaged rates in rural and noncompetitive areas. Section 229(h) acknowledges 
this tension but provides no help in resolving it. 

The concept of universal service traditionally carries with it the idea that cus- 
tomers in rural and noncompetitive areas should have equality of access to tele- 
communications services and networks. This thought appears to be embodied in Sec- 
tion 23(Xa) wherein the States are directed to undertake actions to achieve that 
goal, and the FCC is authorized to take remedial action in the event of failure by 
a state to achieve the goal. The section, though, requires that prices for rural facili- 
ties be based on "reasonably identifiable costs of providing such services" [Sec. 
230(a) (2)], thus suggesting that urban/rural de-averaging is required. This conflicts, 
at leaist in concept, with the mandate of Section 229(h) that States shall ensure that 
rates for services that are not competitive remain "just and reasonable and that uni- 
versal service is preserved and enhanced." Before state entry regulation is pre- 
empted, we must ensure that all customers will be served by a telephone company 
or telecommunications provider. 

The expansive requirement for interconnection in the interstate jurisdiction envi- 
sioned by Section 229(cXl) carries with it the possibility of cost shifts to the intra- 
state jurisdiction if significant volumes of traflic leave the incumbent's network. 
This when combined with price flexibility for competitive areas suggest these costs 
may be bom by rural and non-competitive areas, again threatening the goal of uni- 
versal service. 

Finally, although some large telecommunications users may have need for net- 
work redundancy [Sec.2(8)] and multiple sources of supply, steps should be taken 



241 

to ensure that basic residential customers do not pay for redundancy they do not 
use and that doeb not benefit them. 

LACK OF SUITABLE TRANSITION MECHANISMS, MONITORING AND ABILITY TO RE- 
REGULATE IN THE EVENT OF COMPETITIVE FAILURE 

S. 1086 needs to give some thought to the transition between the existing regu- 
latory structure and a competitive market. State commissions vdll play a large role 
in the transition because we will see the trends and problems long before they be- 
come egregious enough to attract the FCC's attention. Consumer education will be 
very important as well. Studies continue to show that consumer understanding of 
teleconmiunication lags behind the technology. For example, many consumers still 
believe that AT&T is their telephone company. State commissions will be instru- 
mental in providing the assistance and information that consumers will need to 
make the best choices in selecting their teleconununications services. Consumers 
will also be counting on us to he^ them solve the problems they encounter with 
telecommunications services and providers. 

The NARUC supports the inclusion of stronger monitoring provisions in the bill. 
Such information will help us determine the progress that is oeing made toward im- 

f)roving the infrastructure or increasing competition. Should modifications to the 
egislation be necessary in tJie future, sudi data could be very helpful in determin- 
ing liie best course of action. Such data would also be extremely helpful in deter- 
mining the level of competition faced by services or companies, which could be used 
for a variety of purposes including pricmg flexibility. Lastly, monitoring information 
will be helpful m tne enforcement of rules, is a key aspect to making competition 
a reality. 

Finally, we think there should be some recognition that de-regulation mi^t not 
work. Everyone hopes the legislation's result will be effectively competitive markets. 
Equally possible, however, is the emergence of unregulated monopolies or near-mo- 
nopolies. We suggest there be conscious consideration of whether existing anti-trust 
law and enforcement is adequate to guard against this possibility or whether addi- 
tional safeguards should be included in this legislation. 

The success of anv national plan to achieve a competitive, advanced telecommuni- 
c&tions network will need the assistance of autonomous state regulatory bodies to 
monitor the transition and enforce regulations as necessary. I, and all the other 
members of NARUC, look forward to working with the members of this committee 
in clarifying these issues. 
Thank you again for the opportunity to testify on this matter. 



APPENDIX A — RESOLUTION REGARDING S. 1086, "THE TELECOMMUNICATIONS 
INFRASTRUCTURE ACT OF 1993" 

Whereas. On June 9, 1993, Senators Danforth (R-MO) and Inouye (D-HI) intro- 
duced S. 1086, the "Telecommunications Infrastructure Act of 1993"; and 

Whereas, The bill's stated objectives are to: encourage the continued development 
and deployment of advanced and reliable capabilities and services in telecommuni- 
cations networks; ensure the availability of the widest possible rtmge of competitive 
choices in the provision of teleconmiunications and cable television services and en- 
courage the umversal availability of telephone service; and 

Whereas, Numerous states are at the forefront in upgrading their telecommuni- 
cations infrastructure, encouraging new services, and promoting competition; and 

Whereas, The characteristics of the marketplace and the costs of oroviding tele- 
phone service vary geographically and affect the competitive and regulatory environ- 
ments among the states; and 

Whereas, Cooperation between state and federal regulators is the best means to 
ensure that the benefits of competition and infrastructure development will be real- 
ized, consistent with the preservation of universal service, reasonable rates and 
maintenance of hi^ quality service; and 

Whereas. Until such time as competition is achieved, states must have the author- 
ity to ensure against the emergence of unregulated monopolies; and 

Whereas, The bill as currently drafted contedns numerous provisions of concern to 
state regulators including, but not limited to, the following examples: 

• requiring that withm one year, no State statute or regulation, or other state 
legal requirement shall prohibit or limit the ability of any entity to provide tele- 
communications services; 

• directing that interconnection to a carrier's facilities at any technically feasible 
point for provision of telecommunications services must be permitted; 



242 

• authorizing the FCC to preempt state regulatonr measures if determined by the 
FCC that the measures prevent the realization of the goal of ensuring that cus- 
tomers in rural and noncompetitive markets have access to high quality tele- 
communications network facilities and capabilities, regardless of the states evalua- 
tion of the propriety of such measures; 

• providing the FCC with the authority to defme intrastate competitive services 
for purposes of pricing flexibility; 

• identifying universal availability, rather than universal service, as one of the 
seven stated purposes of the bill; 

• requiring state and federal coordination in preserving universal service, with- 
out clarifying whether the FCC could establish universal service policies which the 
state must implement; 

• providing no clearly defined role for states: (1) in assuring that appropriate 
intrastate compensation arrangements between telecommunications carriers are im- 
plemented; (2) developing intraLATA equal access and presubscription requirements 
for cellular and two-way wireless service providers; 

• preempting state regulations relating to the provision of intrsistate information 
services; 

• allowing local exchange carriers to provide video services without addressing 
how the cost of network facilities used jointly to provide basic telephone services and 
video services will be allocated; 

• promoting network redundancy without addressing potential impacts on the 
rate making process; jj • 

• encouraging pricing flexibility for competitive services without addressing the 
effects of deaveraging on rates in noncompetitive and high cost areas; now, therefore 

be it, r Ti 1 

Resolved, That the Executive Committee of the National Association of Regulatory 
Utility Commissioners (NARUC), convened in its 1993 Summer Meetings in San 
Francisco, California, supports the efforts of Congress to encourage the development 
of a modem, efficient and high quality public telecommunications infrastructure and 
to promote competition, consistent with the preservation of universal service, rea- 
sonable rates and maintenance of high quality service; and be it further 

Resolved, That S. 1086 be amended to address the bill's lack of clear definition 
regarding the states' authority to prescribe intrastate telecommunications policies 
and other concerns expressed in this resolution; and be it further 

Resolved, That S. 1086 preserve the states' authority to implement policies that 
reflect market conditions within each state, consistent with the public interest objec- 
tives of encouraging infrastructure development and promoting competition, the 
preservation of universal service, reasonable rates and maintenance of high quality 
service; and be it further 

Resolved, That NARUC encourages cooperation between state and federal regu- 
lators and welcomes the opportunity to work with Congress in order to achieve 
these public interest objectives; and be it further 

Resolved, that the NARUC Washington ofiice be directed to convey these views 
on S. 1086 to Congress. 



Prepared Statement of William F. Squadron, Department of 
Telecommunications and Ent:rgy, the City of New York 

Mr Chairman, Members of the Subcommittee, on behalf of the National Associa- 
tion of Telecommunications OfTicers and Advisors ("NATOA"), I thank you for the 
opportunity to testify today concerning S. 1086, "The Telecommunications Infra- 
structure Act of 1993," introduced by Senators Inouye and Danforth. NATOA r^ep- 
resents local franchising authorities in more than 4,000 jurisdictions, which coll^- 
tively regulate cable television systems that serve an estimated 40 million cable sub- 
scribers. NATOA is affiliated with the National League of Cities, for which it serves 
as a technical advisor on cable television and other telecommunications matters. 

My testimony will focus on those provisions of S. 1086 relatingto the provision 
of video programming services by telephone companies ("telcos"). This testimony is 
based on NATOA's initial review of S. 1086. We look forward to sharing with the 
Subcommittee in the near future any additional comments we might have on the 
bill. ^ 

NATOA was a strong advocate of the Cable Television Consumer Protection and 
Competition Act of 1992 ("1992 Cable Act"). From Jefferson City, Missouri and Gil- 
lette, Wyoming to New York City and Miami, consumers told us loud and clear that 
they wanted protection from skyrocketing rate hikes, poor customer service, and the 



243 

other monopoly practices of many cable operators. We believe that the 1992 Cable 
Act will provide consumers most of that protection. 

NATOA now urges Congress to take the next step necessary to protect consumers. 
That step is to enact legislation that will further promote competition in the provi- 
sion of cable service — which we believe will also reduce the need for regulation. 
NATOA has consistently argued that meaningful competition would increase the 
chances that subscribers womd receive cjuality, yet afibrdable, cable service. We be- 
lieve the only significant way that meaningml competition to a cable system can 
occur is if there is at least one other multichannel video programming distributor 
that ofTers a full array of services and programs comparable to those that traditional 
cable operators provide. 

At this time, telcos have the capability of being one of the few viable alternatives 
to traditional cable operators. In addition to promoting competition, however, a goal 
of telco legislation also should be to ensure that the public receives the benefits and 
protections they expect from commercial users of public property. In order to ensure 
that the public receives such commitments, it is critical that telco legislation recog- 
nize the legitimate and historical role of franchising authorities in the dual federal- 
local structure for the regulation of multichannel video programming service provid- 
ers. In short, local eovemments serve as trustees for their communities to guarantee 
that their rights-of-way and other property are used properly and in the commu- 
nity's interest. 

When it enacted the Cable Communications Policy Act of 1984 and the 1992 Cable 
Act (the "Cable Act"), Congress determined that local governments, by imposing 
franchise requirements, could best ensure that safeguards necessary to protect 
against consumer abuse are in place, and that the public receives the benefits to 
which they are entitled for the use of their property. Congress recognized that "city 
officials have the beet understanding of local communications needs and can require 
cable operators to tailor the cable system to meet those needs." HJl. Rep. No. 934, 
98th Cong., 2d Sees. 24 (1984). NATOA believes that any telco legislation enacted 
by Congress should continue to recognize the critical role of local governments in 
ensuring that "local communications needs" are met. 

The best way to ensure that telcos providing video programing services meet local 
communications needs is to subject them to the same franchising structure and pub- 
lic interest regulations that have operated successfully with respect to cable opera- 
tors — namely, the Cable Act. By subjecting telcos to the Cable Act, Congress would 
ensure, among other things, that telcos: (1) provide community programming and 
local information services, such as, but not limited to, public, educational and gov- 
ernmental access CTEG") channels, facilities and equipment; (2) provide compensa- 
tion to local governments for the for-profit use of local public property and rights- 
of-way; and (3) are subject to local customer service standards and other consumer 
protection measures. 

For the reasons stated above, NATOA has advocated the provision of video pro- 
gramming services by telcos in order to promote competition and technological inno- 
vation, so long as appropriate regulatory conditions and safeguards are established 
and enforced to ensure that the public receives the benefits and protections that 
they have a right to expect from commercial users of public rights-of-way. NATOA 
bebeves S. 1086 is a substantial step in the right direction toward making the bene- 
fits of increased competition and technological innovation, which telephone compa- 
nies claim they can make, available to the public. Such competition and innovation 
must be done in a manner consistent with the pubUc interest. 

NATOA is encouraged that S. 1086 recognizes that a telco providing video pro- 
gramming services within its service area is a "cable operator" under the Cable Act. 
As cable operators, such telcos should be subject to local cable franchising require- 
ments. By identifying such telcos as "cable operators," the bill apparently intends 
that such telcos would be subject to local cable franchising requirements. We believe 
that S. 1086 should be amended to make that intent ciystal clear. Franchising re- 
quirements that S. 1086 should make clear apply to telcos providing video program- 
ming include, but should not be limited to: (1) requirements for PEG facilities, (2) 
franchise fees, and (3) customer service standards. Moreover, both the video ink 
non-video programming services provided as part of a telco's cable service should be 
subject to franchising requirements. 

We believe it is essential that local governments be permitted to require fran- 
chises and impose franchise-related requirements. They are in the best position to 
understand and respond to the cable television needs and interests of consumers 
within their jurisdiction. 

NATOA has urged that if telcos begin to provide cable television service, they 
should do so through a separate video programming subsidiary. We are pleased that 
S. 1086 includes a requirement that video programming be provided through a sepa- 



244 

rate subsidiary. Such structural separation facilitates the audit process and provides 
some assurance that cross-subsidization is avoided. Telephone service customers 
should not be forced to finance a telco's entry into the cable business. S. 1086 also 
properly prohibits telcos from engaging in practices prohibited by the Federal Com- 
munications Commission ("Commission") or a state with regard to cross-subsidiza- 
tion. 

NATOA is concerned that S. 1086 may not subject to local franchising require- 
ments telcos providing transport services for so-called "video dial tone" service. As 
indicated above, NATOA believes that telcos providing video programming services, 
whether through a subsidiary or on a common carrier transport basis as part of 
"video dialtone service, should be subject to appropriate franchising requirements 
under the Cable Act. Local governments have a responsibility toward the property 
that they manage on behalf of their communities. Only through the franclusing 
process can a community be sure to receive appropriate benefits for the commercieu 
use of its property. 

Moreover, as a potential competitor of a franchised cable operator, it is onlv ap- 
propriate that "video dialtone" services be franchised. Among other things, local gov- 
ernments should be able to ensure through franchise requirements that a telco pro- 
viding "video dialtone" transport service: (1) makes transmission facilities available 
to public, educational and governmental users; (2) provides service to subscribers 
throughout a franchise area on a nondiscriminatory basis; (3) complies with 
consumer protection requirements concerning such matters as service, installation 
and billing; and (4) constructs its facilities usmg public streets in a safe and reason- 
able manner.i 

S.1086 sets forth other safeguards to telco entry that NATOA supports or believes 
are steps in the right direction. The bill severely limits the right of a telco to pur- 
chase, or enter into a joint venture or partnership with, any existing cable system 
within its local telephone exchange service area. NATOA believes that this provision 
would be improved if telcos were totally prohibited from having any ownership in- 
terest in an existing cable system. The nve percent ownership interest permitted 
under S. 1086 may result in reduced incentives for fiill and fair competition between 
a telco and the cable system in which it has an ownership interest. We believe that 
a total ownership ban on the purchase of existing systems is a critical restriction 
if telco entry into the cable market is to achieve the desired goal of increasing com- 
petition.2 

There are several provisions in S. 1086 that NATOA asks that the Subcommittee 
consider amending as it reviews this legislation. 

First, we do not believe that telcos providing cable service in rural areas should 
be exempted from the provisions in the bill. Cable consumers in rural areas should 
not be treated as second class citizens and should be entitled to the same protec- 
tions granted under the bill to cable subscribers served by telcos in other areas. 

Second, the bill would preempt state or local regulation of intrastate telecommuni- 
cations services that are inconsistent with federal reflations or S. 1086. NATOA 
hopes that Congress will continue to respect the traditional, long-standing right of 
state and local governments to regulate intrastate communications in the best inter- 
ests of their localities. 

Third, NATOA is concerned with the provision in the bill that would preempt 
state and local regulations or statutes regulating interstate telecommunications 
services that are "inconsistent" with federal regulations and S. 1086. NATOA does 
not suggest that state and local governments should be allowed to regulate in a 
manner that undennines the goals of S.1086. NATOA only suggests that Congress 
grant state and local governments some flexibility in regulating interstate services. 



iln this r^rd, NATOA particularly is concerned with the Conunission's decision to allow 
telcoB to provide video dialtone service without a franchise pursuant to the Cable Act. The FCC, 
in an interpretive ruling, concluded that a "video dialtone" service provider is not a "cable opera- 
tor" required to have a franchise under Section 621(b) of the Cable Act. This ruling is being 
challenged in the U.S. Court of Appeals for the District of Columbia circuit by NATOA, the city 
of New York, other local governments, and cable industry representatives. 

NATOA believes that tne FCC's interpretive ruling is contrary to the express language of the 
Cable Act and Congressional intent We believe that Congress intended, when enacting the 
Cable Act, to subject all multichannel video progranuning distributors that use public nghts- 
of-way to the Cable Act. 

NATOA hopes that Congress, by passage of S. 1086 or some other legislation, will clarify that 
such video dialtone service providers are cable operators subject to franchising requirements. 

2 However, we do believe that in exceptional circumstances local governments should be al- 
lowed to approve the purchase of an existing cable system by a telco. Such circumstances may 
exist where, for example, a telco is the only entity capable of assiuning the operation of a poorly 
performing or abandoned cable system. 



245 

We rec»mmend that the bill be amended to preempt only those state or local stat- 
utes or regulations which are "irreconcilable" with federal law or S. 1086. 

NATOA believes that S. 1086 takes a positive and significant step towards intro- 
ducing competition into a monopoly cable industry, broadening the diversity and 
quality of programming available to consumers, and ensuring that the provision of 
video programming services by telcos is consistent with the public's right to a divi- 
dend from commercial users of public rights-of-way. NATOA applauds Senators 
Inouye and Danforth for their efforts to advance the country's communications infra- 
structure and promote competition in the cable industry. We look forward to work- 
ing closely with the Subcommittee on these issues to make consumers the true bene- 
ficiaries of competitive multichannel video programming technologies. 



Prepared Statement of Gene Kimmelman, Legislative Director, Consumer 

Federation of America 

The Consumer Federation of America (CFA) agrees with the goals articulated by 
Senators Danforth and Inouye in S. 1086, the "Telecommunications Infrastructure 
Act of 1993." We share the belief that a pro-competitive telecommunications policy 
framework that protects universally available and affordable basic phone service, 
provides thorougn protection against cross-subsidization, preserves principles of 
conunon carriage and nondiscrimination and dismantles all inappropriate impedi- 
ments to vibrant competition, is in the public interest. 

CFA believes Congress has a unique opportunity to offer the American people the 
possibility of robust telecommunications competition in all markets without aban- 
doning the social policy gains achieved under the Communications Act of 1934. Mar- 
ketplace developments, technological advances, the AT&T break-up, and passage of 
the 1992 Cable Act make it possible to offer consumers: 

1. a continuation of the decline in real prices for local telephone service (since 
passage of the 1934 Communications Act, local telephone rates have fallen about 60 
percent in inflation adjusted dollars); 

2. an updated definition of "universal service" that guarantees affordable prices 
for an evolving array of services (e.g., lifeline, local exchange, Nddeo, distal) and 
equipment (e.g., telephone, television, computer, and equipment for special needs 
groups) that ensure multimedia connectivity for all citizens and vital institutions 
(e.g., the poor, rural communities, persons with disabilities, schools, health care fa- 
cilities); 

3. increased choice in all communications services and equipment to enhance 
consumer sovereignty over how, when and what to communicate; 

4. lower prices for local exchange, video, and information services that have not 
been subject to either strong competition or effective regulation; and 

5. numerous new services and combinations of services, with appropriate cus- 
tomer privacy protections, that a competitive environment should foster. 

While CFA is confident that the sponsors of S. 1086 share this vision, their legis- 
lation will require significant alteration to meet these goals. Unless S. 1086 is 
amended to include a precise, updated definition of universal service, consumer- 
friendly cost allocation principles (as proposed in §201 of C^hairmem Inouve's S. 
2112, the "Information Services Diversity Act of 1991"), and more thorough safe- 
guards against anti-competitive practices (like in §201 of S. 2112), the legislation 
cannot accomplish its stated goals. 

I. THE ingredients OF A PRO-COMPETITIVE, SOCIALLY RESPONSIBLE 

telecommunications policy 

The fundamental public policy dilemma in attempting to promote free-wheejing 
telecommunications/multimedia competition is how to get from "here" to "there." As 
we found with the Cable Act of 1984, reduced regulation in the name of promoting 
competition can lead to the opposite: entrenched, expanded monopolization. i Also, 
history demonstrates that, contrary to superficial logic, structural prohibitions on di- 
versification (e.g., the Modified Final Judgment Ime of business restrictions, the 
telephone company-cable cross-ownership restriction) help foster the growth of com- 
petition in communications markets. 

To meet the goals of S. 1086 it is therefore critical that Congress base its policy 
directives on actual marketplace experience, rather than superficially attractive 
rhetoric. As S. 1086 generally acknowledges, local telecommunications competition 
can only succeed if local telephone companies are required to open their networks 



iSee Conference Report to accompany S. 12. Cable Television Consumer Protection and Com- 
petition Act of 1992, Report 102-862, Sept, 14, 1992. 



246 

to competition on nondiscriminatory terms and conditions. The bill also appro- 
priately calls for breaking local bottleneck control over telecommunication trans- 
mission before allowing the local exchange carriers to expand into an adjacent mar- 
ket like cable television. Unfortunately, the bill does not provide adequate safe- 
guards to ensure the development of local competition, or the preservation of afford- 
able local phone service, before allowing local exchange carrier expansion into the 
video mariset. 

II. UNIVERSAL SERVICE: PRESERVING A SOCIAL POLICY TRADITION 

It is of course no accident that local telephone service is one of the best "buys" 
in today's marketplace. The various elements of "universal telephone service" — e.g., 
"just and reasonable" prices for basic phone service, "lifeline service" for low-income 
households and a "high cost fund" to moderate prices in rural America — emanating 
from the Communications Act of 1934, state regulatory statutes, corporate strategy 
and regulatory policy, reflect America's historical commitment to making prices for 
basic communications services a bargain for all citizens. The ongoing success of our 
universal service ethic is reflected in simple statistics; since the 1930's, the price of 
local phone service has declined, in constant dollars, by about 60 percent, making 
it possible for about 93 percent of households to have a telephone toaay.2 

Unfortunately, many telephone industry officials claim this universal service ethic 
cannot be preserved in an increasingly competitive telecommunications market. 
They in essence relegate our nation's most important and successful tool that pro- 
motes ubiquitous egalitarian dialogue, discourse and increasingly essential conmiu- 
nications options, to the position of an anachronism suitable omy to a monopoly en- 
vironment. According to this logic, a competitive market cannot coincide with the 
low priced local phone service that our universal service policy currently ensures.^ 

K the industry view of the telecommunications market is correct, then consumers 
have more to lose than gain from a simple pro-competition policy. Under this sce- 
nario, the most essential local phone services could lace steep price increases, with 
competition driving down prices for large volume users of data, long distance and 
other sophisticated high-end conununications applications. The vast majority of con- 
sumers that principally rely on the phone to reach family, friends and local business 
contacts would pay more than they currently do under our universal service ethic. 

On the other hand, if Congress preserves our universal service tradition as it 
opens the door to ftiU-scale telecommunications competition, consumers would be in- 
sulated from local rate hikes and could receive significant benefits from competitive 
pressures to develop more useful information age services. This is the environment 
that CFA believes, with the appropriate universal service and safeguard amend- 
ments, S. 1086 could promote. 

Since local telephone compainies believe they should raise local rates significantly 
to respond to competitive pressures,* it is unlikely that S. 1086's va^e universal 
service language will provide consumers any protection against rate increases un- 
less the bill is amended to specifically cap local rates as part of its universal service 
mandate. In the transition to a competitive environment, this can be accomplished 
by continuing to require aU telecommunications service providers that interconnect 
in any fashion with the local exchange carrier's networks, to pay an access charge 
that supports universal service with contributions to joint ana common network 
costs. 

As new service providers begin replacing the local exchange telephone company 
as consumers' local carrier, this access charge can evolve into a public network 
transmission surcharge (based on the provider's net public switched transmission 
revenue) that would replace today's high cost fund, lifeline fund and preserve the 
tradition of declining local telephone rates. Because this mechanism would treat all 
telecommunications providers alike, it would in no way reduce or handicap the de- 
velopment of competitive local telephone service. Most importantly, as competition 
grows — most likely in an uneven and unpredictable fashion — this universal service 
mechanism would continue to guarantee tnat low-income, rural households and con- 
sumers with disabilities have access to the same or functional equivalent of local 
phone services that all other consumers receive for a reasonable price. 



2 See Kimmelman and Cooper, 'Divestiture Plus Five," Dec. 1988. We highlight the fact that, 
despite the success of our universal service policy, it reniains a "work in progress" since about 
20 percent of households below the poverty-line remain phoneless, and half the states do not 
provide subsidized "Lifeline" programs for low-income families. 

3 See Statement of Gary McBee, USTA, on S. 1086 before the Senate Commerce Committee, 
July 14, 1993 at 6. 

4 Id. 



247 

If the Bell telephone companies are allowed to maintain or expand their informa- 
tion services business, and all local exchange carriers are permitted to enter the 
video business in their telephone service territory, as proposed in S. 1086, consum- 
ers are likely to facs dramatic overcharge for local phone service (until efTective local 
competition develops). As we have pointed out in great detail to this Committee, 
consumers have been increasingly abused throu^ overcharges by local telephone 
monopolies that use ratepayer ftinds to expand into new markets.' As we have also 

f>ointed out, the greater the incentive to shift costs onto monopoly ratepayers, the 
ess the possibility for state and federal regulators to uncover the abuse and protect 
consumers .8 

In the case of video service, the risks to telephone ratepayers are enormous. Even 
if the local exchange carriers take five to ten years to expand their telephone net- 
works to provide video services, using the cheapest means available, experts esti- 
mate that these companies will need an additional $10-20/month from each tele- 
phone subscriber to cover their costs.^ Even Bell Atlantic's recent statement, that 
its video subsidiary will pay for $500Aine in network upgrades, could leave tele- 
phone ratepayers paying and additional $l,000/line to make the phone system capa- 
ble of transmitting video signals: 

Bruce L. Egan, a research fellow at Columbia University's Institute for Tele- 
Information, recently estimated the amount of money needed by the cable and 
telephone industries to upgrade their services. 

To reach the modest goal of supplying both conventional cable television and 
ordinary phone service over the same line, telephone companies would have to 
spend about $1,500 * * *8 
Surprisingly, the Federal Communications Commission (FCC) has failed to de- 
velop rules to deal with the hundreds of billions of dollars involved in local exchange 
carriers' network alterations to provide video services. Rather than develop clear 
guidelines to govern critical consumer protection issues, the FCC decided to address 
"video dialtone" issues involving federal/state jurisdiction, cost allocation, pricing 
and consumers safeguards on an ad hoc, application by application basis.^ So far, 
local exchange companies have proposed chareing their telephone ratepayers most 
of the costs associated with putting fiber optic T-runk" lines in place to provide video 
services. 10 And so far, the FCC has not objected to this flagrant rip-off of telephone 
ratepayers. 

Unfortunately, S. 1086 does not explicitly insulate telephone ratepayers from pay- 
ing for infrastructure investments designed to provide information or video services 
(See §8's and § ll's general reference to subsidies involving "the improper assign- 
ment of costs"). To protect telephone ratepayers from inflated local rates, S. 1086 
must be amended to include S. 2112*8 cost allocation rules (§201 amending §227 
(D and (g) of the Communications Act of 1934) which directly prohibits the loading 
of "joint and common' costs related to information services onto local telephone 
rates. CFA believes similar specific statutory language is needed to prevent cost 
misallocations related to video services. 

in. PROMOTING COMPETITION 

So long as Congress ensures that universal service (as defined in section 11, 
supra.) is preserved, CFA strongly endorses S. 1086's goals of promoting local tele- 
phone competition and devising fair competitive safeguards for all telecommuni- 
cations providers and users. While we believe S. 2112's market entry test would pro- 
vide the greatest assurance of robust competition, S. 1086's competitive safeguards 
can be fine-tuned to protect information services and video competition. 

By eliminating barriers to entry into local telecommunications markets, and pre- 
venting local telephone monopolies from buying local cable monopolies (or vice 
versa), S. 1086 provides an essential, fair starting point for pro-competitive tele- 



8 See Statement of Gene Kimmelman before the Senate Communications Subcommittee on S. 
1981, May 9. 1990. 

eid. 

7 Edmund L. Andrews, "A Baby Bell Primed for the Big Fight," New York Times, Feb 21, 
1993, citing Bruce Egan at Columbia University's Institute for Tele-Information. See also Eh-. 
Mark Cooper, Developing the Information Age in the 1990's, CFA, June 8, 1992; and William 
Page Montgomery, Accelerated Broadband Networks, ETI, Feb., 1992. 

* Andrews, op.cit 

9 Telephone Company/Cable Television Cross-Ownership Rules, Second Report and Order, 7 
FCC Red. 5781 (1992). 

10 In the Matter of the Application of the New Jersey Bell Atlantic Co. (Florshan System), Pile 
No. W-P-C-6858, Nov 16, 1992 at 5, (Dover System), File No. W-P-C-6840, Dec 15, 1992 at 5. 



248 

communications policjr.nAlthough it is unclear how competitive the local telephone 
and video maricets will become in the future, S. 1086 appropriately prevents either 
local telephone companies or cable companies from collaborating to cut off competi- 
tion before it has a chance to get started. 

Given the Bell telephone companies' history of anticompetitive practices, 12 S. 1086 
does not do enough to maintain or enhance competition m the information or video 
services that the legislation would aUow local phone companies to offer. S. 1086's 
competitive safeguards have no meat on their bones. CFA therefore supports more 
detailed and through separate subsidiary, auditing and privacy requirements for all 
information and video services offered by the Bell companies. By augmenting S. 
1086 with the safeguards from §201 of S. 2112 and similar legislative proposals 
under consideration in the House of Representatives,!^ Congress can maintain and 
expand competitive mariiet forces in all aspects of telecommunications as the Bells 
move into new markets. 

CONCLUSION 

While CFA concurs with the goals of S.1086, we cannot support this legislation 
unless it is amended with a specific comprehensive definition of universal telephone 
service, cost allocation rules that preserve the declining-price tradition 01^ local 
phone service, and more specific competitive safeguards. Unless opening the tele- 
communications market to more competition, including local phone company provi- 
sion of cable television service, involves continued real-price reductions for local 
phone service along with broader choices of information age services, consumers 
may have more to lose than gain from a restructuring of the telephone industry. 
3y augmenting S. 1086's broad policy tlirectives with a precise definition of univer- 
sal service and S. 2112's more specific cost allocation and competitive safeguard pro- 
visions. Congress can usher in a new era of falling prices and maximum competition 
in all communications markets. 



Letter From Gary W. McBee, Vice Chairman, Board of Directors, United 

States Telephone Assocl\tion 

July 28, 1993. 

The Honorable Daniel K. Inouye, 
U.S. Senate, 
Washington, DC 20510 

Dear Chairman Inouye: Thank you for the opportunity to testify on S. 1086. I 
hope that the testimorw will be helpful in your deliberations on the bill. 

I would like to clarify two issues we discussed during the hearing. It is my under- 
standing that the hearing record will remain open until July 28tn and that these 
additional comments will be part of the hearing record. 

I. USTA POSITION ON RBOC INTER-LATA RELIEF 

Discussions are ongoing at USTA on the issue of supporting inter-LATA relief for 
the regional Bell operating companies. While no consensus has yet been reached on 
full inter-LATA relief, the membership of USTA does support the specific inter- 
LATA relief provisions contained in S. 1086. 

II. RECOVERY OF COSTS AND THE EFFECT OF COMPETITION ON UNIVERSAL SERVICE 

There also appeared to be confusion over the recovery of a telephone company's 
costs in providing residential and rural telephone service. 

To assist the Committee in understanding the significant level of contribution to 
universal service that is provided by revenues generated by other local exchange 
carrier services, I have attached a series of studies that were released recently bv 
USTA. Among these materials are the Strategic Policy Research and BellCore stud- 
ies I referenced in my testimony. 



11 Preventing the combination of telephone and cable monopolies in any market is particularly 
significant given the recent Federal District Court decision that the cable- telephone company 
cross-ownership restriction is unconstitutional. C&P Telephone Co. of Via. v. U.S., Cir. No. 92- 
1751- A, E. Dist. Va., Aug 24, 1993. While we believe this ruling will be overturned on appeal, 
it opens the door to multimedia monopolies in the interim. 

12 See Dr. Mark N. Cooper, Divestiture Plus Eight, CFA, Dec., 1992. 

uH.R. 3515 (102nd Congress, Ist Session), H.R. 5096 (102nd Congress, 2nd Session) and Rep. 
Marke/s Discussion Drafts, Aug. 1, 1991, et al. 



249 

These studies illustrate that basic local exchange service is priced below actual 
cost and is highly subsidized. The level of subsidy diflers sunong various regulatory 
jurisdictions. 

While each of these studies is instructive, the conclusions of the Strategic Policy 



Research [SPR] study are particularly compelling. 
The SPR study explains that regula 



latory policy has promoted universal service by 
maintaining artfficia'lly low rates for rural areas and for residential customers. In 
a competitive marketplace, however, prices for services will move towards cost. The 
study states such changes could have a "seismic intensity" on the price of local tele- 
phone service in that as much as $21.8 billion of internal subsidy generated by ac- 
cess chaises and intra-LATA toll would be jeopardized. 

Rather than view this issue in a theoretical or national model, the telephone in- 
dustry would offer the island of Hawaii as an example of the gap between what a 
local telco charges for local residential services and the cost of providing that serv- 
ice. In a recent filing with the Hawaiian Commission, the Hawaiian Telephone Com- 
pany estimated the Long run incremental costs of providing an individual line to 
be $60.37 per month. Tne rate the Hawaiian Telephone Company is permitted 
under tariff to charge a residential customer for that $60.37 a month line is $12.25. 

The subsidies to fund this gap have been maintained by policy makers in order 
to ensure that telephone service is universally available at reasonable rates. The 
emergence of new providers of local service threatens the viability of this subsidy 
system. If policy makers are going to encourage open competition in the local ex- 
change market, they must first confront this matter. If policy makers decide that 
subsidization is still good public policy, then all firms that provide telecommuni- 
cations services or connect with the public network must share the burden. 

S. 1086 promotes local competition, but in USTA's view, fails to adequately pro- 
tect universal service. 

Gary W. McBee, 
Vice Chairman, Board of Directors. 

[The material referred to above may be found in the committee files.] 



Letter From John F. Sturm, Senior Vice President, Government, Legal and 
Public Policy, Newspaper Assocl\tion of America 

July 28, 1993. 

The Honorable Daniel K. Inouye, 
U.S. Senate. 
Washington, DC 20510 

Dear Chairman Inouye: On behalf of the Newspaper Association of America 
(NAA) I would like to thank you once again for considering our views on S. 1086, 
the Teleconmiunications Infrastructure Act of 1993, as set forth in the testimony of 
Uzal H. Martz, Jr., President and Publisher of the Pottsville (PA) Republican and 
a member of the NAA Board of Governors. 

As noted at the hearing, NAA strongly encourages the development of local loop 
competition but also recognizes the dangers that will be inherent in the RBOCs' 
telephone exchange monopolies until competition becomes a reality. In particular, 
NAA believes that if the RBOCs are to engage in electronic publishing, much 
stronger safeguards are needed than those now in effect under FCC and state regu- 
lation. In broad outline, we support the framework for safeguards spelled out in S. 
1086. As indicated in our July 14 testimony, we are eager to work with you and 
your staff to develop the concepts outlined in S. 1086 into comprehensive vet work- 
able safeguards that will permit electronic publishing to continue to flourish. 

In that spirit, we have a number of suggestions where we believe the provisions 
of S. 1086 can be made more effective, especially by including more detail and speci- 
ficity, as was done in S. 2112 in the last Congress. 

Entry test. NAA believes that the goal of encouraging development of a competi- 
tive electronic publishing industry is not well served by broad RBOC participation 
when market conditions are still susceptible to abuse. Thus, we would urge you to 
include an entry test, such as that contained in section 201 of S. 2112. We would 
welcome an opportunity to work with you and your staff to refine the S. 2112 entry 
test to more precisely match entry with the development of competition in various 
submarkets, so that the RBOCs will be neither hanoicapped nor advantaged. 



250 

Sec. 233(h)(l)A Separate subsidiary. S. 1086 reouires the Bell Telephone Compa- 
nies and their afliliates to provide electronic publishing only through a separate 
subsidiary. We support this safeguard as an essential improvement over current 
FCC policy. However, and particularly in light of the FCC's reluctance to require 
separation,2 we urge you to spell out in some detail the organizational and business 
areas that must be separated. In particular, and as was provided in S. 2112, the 
separate subsidiary should have separate directors, officers, and employees, sepa- 
rate property, and financing, especially of debt. In addition the subsidiary should 
have a separate corporate i(fentity, such as trademarks and servicemarks. 

Sec. 233(h)(2). Transaction requirements. The bill prohibits transactions between 
the telephone operating companies or their aflUiates and the separate subsidiary 
from b»eing based on discrimination or preference arising out of their affiliation. This 
requirement will be difficult to administer and enforce. We strongly suggest that an 
objective requirement be added that all such transactions be at "arms length" and 
financially sound, so that the telephone companies must deal with their subsidiary 
in the same manner as unaffiliated parties deal with one another. Also, in order 
that any violations of the requirements may be discovered and remedied, we urge 
you to include the requirements from S. 2112 that transactions be pursuant to puo- 
licly available contracts or tariffs and be fully auditable. 

Sec. 233(b)(3). Separate operation and property. In addition to the restriction 
against joint ventures and partnerships, as indicated above, there should be require- 
ments for separate employees, financial structure and property. 

Sec. 233(b)(4). Separate commercial activities. We strongly support the bill's provi- 
sion requiring separate marketing and sales. To preclude indirect cross-subsidies, 
other activities should also be separate, namely, accounting, hiring and training of 
personnel, purchasing, installation, and maintenance, and research and develop- 
ment. Several of these items were included in S. 2112. 

Sec. 233(b)(5). Books, records and accounts. The requirement for separate books, 
records, and accounts is essential, but it should be supplemented by public reporting 
requirements to act as a further check on abuses and to provide an additionsu 
means of detecting violations, e.q., unconsolidated financial statements and SEC- 
type reports (both of which were required by S. 2112). 

Sec. 233(b)(6). Provision of services and information. The requirement that serv- 
ices or information that a Bell Telephone Company provides to its subsidiary also 
be provided on the same terms and conditions to other publishers should not be 
evaded by indirect transactions through other affiliates via the parent holding com- 
pany (RBOC). 

Sec. 233(c). Prevention of cross subsidies. The bill requires a cost allocation system 
that is intended to prevent cross subsidies, but gives the FCC complete discretion 
to implement it. As was provided in S. 2112, the legislation should spell out how 
transactions between the operating company and its subsidiary will be valued to 
prevent cross subsidies. 

Enforcement. Due to the size and complexity of the RBOCs, it may be difficult or 
impossible to detect violations of the safeguards cjuickly. Therefore, as was provided 
in S. 2112, annual compliance audits should be required. In addition, because com- 



1 References are to sections of the Communications Act as it would be amended by S. 1086. 

2 The FCC's Computer I decision required "maximum separation" between a telephone compa- 
ny's regulated services and data processing services. Regulatory and Polini' Problem Presented 
by the Interdependence of Computer and Communications Services and Facilities, 28 FCC 2d 
291(1970) (Tentative Decision), 28 FCC 2d 267 (1971) (Final Decision), affd in part and rcvd 
in part, GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973). In Computer II, the FCC refined 
its policy to require separation between basic communications services and "enhanced services," 
which correspond to information services and include electronic publishing. Amendment of Sec- 
tion 64.702 of the Commission's Rules, 77 FCC 2d 384 (Final Decision), recon., 84 FCC 2d 50 
(1980), further recon., 88 FCC 2d 512 (1981) (Further Reconsideration), afiPd, Computer & Com- 
munications Industry Ass'n v. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert, denied, 461 U.S. 938 
(1983). 

The FCC reversed 
Antendment of Sections 

quiry) (CC Docket No. 85-229), Phase 1, Report and Order, 104 FCC 2d 958 (1986), recon., 2 
FCCf Red 3035 (1987), further recon., 3 FCC Red 1135 (1988), second further recon., 4 FCC Red 
5927 (1989), Phase 11 Report and Order, 2 FCC Red 3072 (1987), recon., 3 FCC Red 1150 (1988), 
further recon., 4 FCC Red 5927 (1989). This decision was vacated by the court of appeals due 
to the FCC's faulty decision to remove structural separations. California v. FCC, 905 F.2d 1217 
(9th Cir. 1990). 

On remand from the court of appeals, the FCC reaffirmed its decision to eliminate structural 
separations. Computer III Remand Proceedings: Bell Operating Company Safeguards and Tier 
1 Local Exchange Company Safeguards (CC Docket No, 90-623), 6 FCC Red 7571 (1991). NAA 
and other have appealed this decision. California v. FCC, No. 92-70083 (9th Cir.). 



ed its long-standing policy requiring separate subsidiaries in Computer 111. 
tions 64.702 of the Commission's Rules and Regulations (Third Computer In- 



251 

petitors may be injured by violations, the bill should provide for a private right of 
action that would include injunctive relief and damages, again as was done in S. 
2112. 

Once again, we look forward to meeting with you and your able staff on this issue. 
If you have any questions, please direct tnem to the undersigned. 

John F. Sturm. 



Letter From Tonda F. Rush, President and CEO, National Newspaper 

Association 

July 28, 1993. 

Honorable Daniel K. Inouye, 
U.S. Senate, 
Washington, DC 20510 

Dear Mr. Chairman: On behalf of the National Newspaper Association, I am 
writing to ask you to include the text of the Bums amendment for local information 
providers as an addendum to the record of the July 14 hearing on S. 1086. We 
would appreciate your including this letter and the attadied amendment language 
in the hearing record. 

As our witness, Mr. Dsilton Wright, testified at the hearing, the language em- 
bodied in the Bums amendment is of paramount importance to small, community 
newspapers because of its ^arantees of access and equal rates for local information 
providers. We feel that it is essential that the members of the subcommittee have 
the language of the Bums amendment available to them in the record so that they 
can consider the importance of including statutory protection for local information 
providers in legislation designed to create national telecommunications policy. 

Thank you for the courtesy extended to the National Newspaper Association at 
the July 14 hearing and throughout the legislative process. 
Sincerely, 

ToNDA F. Rush, 
President and CEO. 



PROPOSED changes TO S. 1086, TELECOMMUNICATIONS INFRASTRUCTURE ACT OF 1993 

On page 6, line 15, insert the following: 

"(26) local information services are essential to maintaining local commu- 
nities." 

On page 9, line 12, insert the following: 

"(oo) 'Local provider" means any publisher or broadcaster of an electronic 
service generated within and intended primarily for distribution within a local 
government jurisdiction." 

On page 11, Une 11, insert the following: 

"(6) nondiscriminatory access to any of the carrier's telecommunications fa- 
cilities and information necessary to the transmission and routing of any tele- 
communications service or information service and the inoperability of both car- 
riers' networks; and gfuaranteed nondiscriminatory access to local information 
providers in any situation where the facilities or services are limited by physical 
or technological barriers." 

On page 14, line 17, after "providing such services," insert the following: 
"provided that a local information provider may be required to pay a non- 
discriminatory rate no higher than any rate offered to any other miormation 
provider in the market." 



Prepared Statement of the Public Service Commission of the District of 

Columbia 

introduction 

The F*ublic Service Commission of the District of Columbia (D.C. PSC) hereby sub- 
mits these comments on S. 1086, the Universal Service and Telecommunications Li- 
frastructure Development Act of 1993. 

The D.C. PSC is concerned that S. 1086 would significantly reduce state commis- 
sion jurisdiction over telecommunications. The D.C. PSC submits that state commis- 
sions play an important role in supporting universal service. In the D.C. PSC's view, 
the provision of Section 229(dX2) which provides that states "shall ensure the pres- 



70-334 0-94-9 



252 

ervation and advancement of universal service," rings hollow if states are not per- 
mitted to take action to preclude impacts on local customers. In particular, the D.C. 
PSC is concerned that states are precluded from determining whether entry of com- 
petitive providers ^ould be permitted, under what conditions telecommunications 
carriers should have pricing flexibility, what advanced services should be provided 
to subscribers, and at what rates, terms and conditions information services should 
be ofTered. The D.C. PSC also submits that where separate subsidiaries are required 
for Bell Telephone Company information services, states should have the ability to 
audit the books of the subsidiary in order to preclude cross-subsidization. If these 
changes are not made, there is httle that the D.C. PSC can do to protect universal 
service or prevent cross subsidization. The District of Columbia has had a signifi- 
cant decrease in the telephone penetration rate since 1984, resulting in a reduction 
in universal service, and since tnere is no long-distance service in the District of Co- 
lumbia, the D.C. reC cannot set long distance rates to cover costs of low-income 
subscribers to basic exchange service. Therefore, the D.C. PSC contends that state 
commissions should be able to determine (1) whether entry of new competitors and 
provision of new services will increase costs which will result in reduction of tele- 
phone usage by low income residents, (2) whether a local market is or is not so com- 
petitive as to warrant flexible pricing, and (3) whether Bell Telephone Company pro- 
vision of information services will result in cross-subsidization. The D.C. PoC there- 
fore proposes amendments to the bill as set forth below. 

In addition, the D.C. PSC points out that the proposed amendment Sec. 613(b) 
would require tariffs to be filed with states whose laws do not provide for the filing 
of tarifTs for video programming. Instead, the legislation should contain a provision 
requiring the convening of a ,K)int Board to separate the costs of video progrsim- 
ming, as is contained in H-R. 1504. 

PROPOSED CHANGES 

Sec. 229(a) Removal of Barriers To Entry 

The D.C. PSC urges that this section be eliminated, since it precludes state com- 
missions from consWering the impact that new entry would have on universal serv- 
ice. At the very least, it should provide that state conmiissions may onlv prohibit 
entry upon a showing that new entry would preclude the preservation ana advance- 
ment ofuniversal service. 

Sec. 229(bX2) Pricing Flexibility 

This section should be amended to add the words "or state commissions" after the 
words "the Conmiission" in line three. As presently set forth, the language permits 
only the Federal Communications Commission (FCC) and not state commissions to 
determine whether services are competitive and warrant flexible pricing. Competi- 
tion for local exchange service is likely to be different in different localities, and 
state commissions should be permitted to determine its existence based on their fa- 
miliarity with local conditions. 

S77. 230(B) Full Effectuation 

This section permits the FCC to determine what hirfi quality services are re- 
quired and to preempt any state action precluding the offering of such services. Citi- 
zens in particular localities should not be required to pay for advanced services 
which they do not need and state commissions should have a role in determining 
what services will be available. In that connection. Section 23(Kc), State Regulatoiy 
Incentives, is a better way of achieving advanced services than FCC preemption. 
The D.C. PSC hereby urges the elimination of Section 23(Xc) 

Sec. 613(b)(2)(B) Restrictions on Ownership and Control of Cable Television Systems 
by Telephone Companies 
The D.C. PSC opposes Section 613(bX2XB). This section requires that video pro- 
gramming by common carriers shall be preceded by a tariff filing which has been 
approved by the state in which the common carrier provides service. The District 
of Columbia has no law which requires the filing of tariffs for video programming 
service, and therefore this provision would require State action which is not consist- 
ent with State law. Instead, the D.C. PSC urges that the bUl adopt the provision 
in H.R. 1504 which contains a requirement that a Joint Board be convened to deter- 
mine the jurisdictional separation of video programming. Such a requirement would 
enable state commissions toprevent cross subsidization of video progr ammin g by 
telephone exchange service. The language is set forth below: 

Joint Board— The Commission shall, within 30 days after the date of the en- 
actment of this part, convene a Federal-State Joint Board under the provisions 
of section 410(c) for the purpose of establishing the practices, classifications, 



253 

and regulations as may be necessary to ensure proper jurisdictional separation 
and allocations of the costs of providing video programming. 

Sec. 233(B) Separate Subsidiary 

This section is unclear, since it applies only to electronic publishing service, while 
section 233(c), which states that it relies in part on "the subsidiary reouirements 
of subsection (b)," relates to all information services. Further, the D.C. PSC urges 
that the following language be added: 

(7) States may determine the amount of electronic publishing revenues that 
will be used to contribute to universal service. 

As stated above, states have a limited amount of revenue to support universal 
service, and should be permitted to direct the Bell Telephone Companies to use all 
or part of their electronic publishing revenues to make a contribution, as required 
by Section 2(10). 

Sec. 233(c) Prevention of Cross Subsidies 

While this section prohibits subsidies from exchange and exchange access service 
to Bell Telephone Company information services, it does not provide an enforcement 
mechanism, other than the provision in Section 23(XbX5) for the FCC to prescribe 
accounting rules for electronic publishing services. The D.C. PSC submits that 
states, which regulate exchange and exchange access services, can prevent cross 
subsidies if they are given the tools to do so. Accordingly, at the end of Section 
23(Xc), the following sentence should be inserted: 

States may audit the books of any such affiliate to determine whether its 

services have been subsidised by revenues from telephone exchange service or 

telephone exchange access service. 

Sec. 13 Jurisdiction 

This section should be eliminated because it preempts state regulation of informa- 
tion services. The D.C. PSC submits that states should be able to regulate informa- 
tion services, and may need to do so to preclude cross subsidization of these services 
by exchange and exchange access services. 

Prepared Statement of James E. Levin, Vice President, Government Affairs, 

Sprint Communications Co. 

Pursuant to discussions with the Subcommittee staff, on behalf of Sprint Commu- 
nications Co. ("Sprint"), I hereby submit our views on S. 1086 for the hearing record. 
Sprint is supportive of the need for legislation in this area and of this bill in particu- 
lar. We would, however, suggest a number of changes to several sections of the bill, 
which we believe are needed to foster a healthy, dynamic and competitive tele- 
communications maricetplace in the future. If these changes or similar modifications 
to S. 1086 are made, Sprint can enthusiastically support the legislation. Our sugges- 
tions are outlined as follows: 

I. DEFINITIONS (SECTION 4 OF THE BILL) 

We believe that the definition of "telecommunications service" should be expanded 
to include entities that provide access or access-like services but don't directly inter- 
connect with a LEG. Suggested language is as follows: 

(ii) "Teleconununications service means the offering of — 

(1) telecommunications facilities that (A) are owned or controlled by a 
provider of telephone exchange service or (B) interconnect with the network 
of a provider oi telephone exchange service, or (G) interconnect with other 
facilities that interconnect with the network of a provider of telephone ex- 
change service and provide access services (or the functional equivalent 
thereoO, as defined by the Commission; or 

II. TELECOMMUNICATIONS COMPETITION (SECTION 5 OF THE BILL) 

Section 229(c) should be modified to permit economic considerations when con- 
templating interconnection to local telephone networics. Suggested language is as 
follows: 

(1) interconnection to the carrier's telecommunications facilities at any tech- 
nically and economically feaisible point within the cfirrier's network; 

(3) nondiscriminatory access where technically and economically feasible to 
poles, ducts, conduits, and rights of way owned or controlled by the carrier; 
Section 229(d) should authorize the FCC to determine the impact of competition 
on universal service. Suggested language is as follows: 



254 

(2) The Commission shall, within ninety (90) days after enactment of this 
Act, institute a notice of proposed rulemaking that convenes, under Section 410, 
a Joint Board to detenmne the impact of competition on universal service and 
to develop rules to preserve and advance universal service. Notwithstanding 
any other provision of this Act, such Joint Board shall complete its proceeding 
and issue its report within eighteen (18) months of its creation and the Commis- 
sion shall complete its rulem^ing within twelve (12) months after receipt of the 
Joint Board's report. 

(3) In administering this subsection, the Joint Board and (Commission shall 
ensure that universal service funding methods provide support for (A) individ- 
uals that cannot afford the cost of Qieir telecommunications service or equip- 
ment, and (B) local exchange carriers the (Commission determines serve hi^- 
cost areas. In determining wnich carriers serve hi^-cost areas, the Commission 
shall consider, among other relevant facts, each local exchange carrier's local 
loop costs compared to the national average loccd loop costs. 

Section 229(h) should definitively authorize local pricing flexibility. Suggested lan- 
guage is as follows: 

(2) The Commission and the States shall permit telecommunications carriers 
to have the ability to price flexibly, but not discriminatorily, for services the 
Commission finds are competitive. In recognition of the increasing competition 
in the provision of local exchange services, the Commission shall institute a 
rulemaking to determine the appropriate form and level of future regulation, if 
any, of local exchange carriers and local exchange service competitors. 

m. INFRASTRUCTURE INVESTMENT (SECnON 6 OF THE BILL) 

Section 230(a) should emphasize economic considerations in the deployment of 
technology. Suggested language is as follows: 

(a) The (Jommission and state regulatory authorities shall ensure, and the 
Commission shall promulgated regulations that ensure telecommunications car- 
riers provide consumers in rural markets and noncompetitive markets with ac- 
cess to high quality, technologically advanced smd economically sustainable net- 
work facilities emd capabilities which — 
Section 230(c) should authorize the FCC to develop regulatory incentives to pro- 
mote infrastructure development. Suggested language is as follows: 

(c) Regulatory Incentives. — The (Commission and the States are encour- 
aged to implement incentives, including incentives providing for accelerated 
capital recovery, to promote the development of high quahty telecommuni- 
cations network facilities and capabilities. If regulatory incentives fail to result 
in the deployment of high quality telecommunications network facilities and ca- 
pabilities in rural mariiets and noncompetitive markets, the States may adopt 
other methods to ensure that the goal oi subsection (a) is achieved. 
Section 23(Kd) should be changed to authorize local telcos to share network facili- 
ties. Suggested language is as follows: 

(a) Infrastructure sharing. — To the extent it finds it reasonable, necessary 
to achieve the goal of subsection (a), and otherwise in the public interest, the 
Commission may promulgate regulations authorizing local exchange carriers to 
share or jointly provide, on terms the Commission finds to be reasonable, net- 
work facilities and capabilities in rural and noncompetitive markets. 

IV. IMPLEMENTING REGULATIONS (SECTION 7 OF THE BILL) 

This provision should be revised to accommodate FCC and Joint Board rule-mak- 
ing activities. Suggested language is as follows: 

(a) Except as provided in Section 229(dX2), the Commission shall issue regu- 
lations to implement this Act within 12 months after the date of enactment of 
this Act. Such regulations shall take effect within 6 months after their issuance, 
except that the Commission may extend such effective date for up to 24 addi- 
tional months for any small carrier providing telephone exchange service in 
rural areas, upon a showing by the carrier that compUance would not be tech- 
nically or economically feasible without additional time. 

v. CABLE TELEVISION SYSTEMS (SECTION 8 OF THE BILL) 

Section 613(bXlXB) should be revised to permit joint ventures between telephone 
and cable TV companies, but only to the extent that they do not amount to a cir- 
cumvention of the ownership restriction. Suggested language is as follows: 

enter into a joint venture or partnership with such cable system if the purpose, 
result or effect of such joint venture or partnership is to enable either party to 
avoid the ownership restriction containea in subsection (bXlXA). 



255 

Section 613(bXlXA) should be amended to apply the cable TV ownership restric- 
tion in areas with greater than 10,000 population. Suggested language is as follows: 
Except as to proposed service areas containing any incorporated or unincor- 
porated place of 10,000 inhabitants or more, or any part thereof, no carrier 
shall: 
Section 613(bX2XB) should be deleted to allow local telephone companies to pro- 
vide programming services to subscribers in the same way as cable TV companies 
are now able to provide such services. 

VI. INTEREXCHANGE SERVICES (SECTION 9 OF THE BILL) 

Section 231 should codify the AT&T Consent Decree's restriction against the pro- 
vision of interLATA services by the Bell Companies, if exceptions to that restriction 
are to be permitted. Suggested language is as follows: 

(i) Except as provided in these sections, no Bell Telephone Company or affili- 
ate thereof shall directly or indirectly provide any interexchange telecommuni- 
cations or interexchange information service. 

(ii) No earlier than 10 years after the enactment of this section, a Bell Tele- 
phone Company or its afliliate may apply to the Commission for authorization 
to provide interexchange telecommunications or interexchange information serv- 
ices. 

(iii) The Commission shall grant authorization to a Bell Telephone Company 
or its affiliate that has applied under subsection (b) only to the extent that such 
company proves that there is no substantial possibility that such company could 
use monopoly power to impede competition in any relevant market for the activ- 
ity to which the application relates. 

(iv) The determination by the Commission regarding an application made 
under subsection (c) shall be final unless, within 60 days after such determina- 
tion, any person injured by the determination commences a civil action against 
the Commission in any district court of the United States for a de novo deter- 
mination regarding the application. 

(v) The court shall enter a judgment granting the authorization for which the 

Bell Telephone Company or its affiliate applied to the Commission only to the 

extent that such company proves that there is no substantial possibility that 

such company could use monopoly power to impede competition in any relevant 

market for the activity to which the application relates. 

Section 231(bX2) should be revised to clarify that the Bell Companies are being 

authorized to provide interLATA cable service only to the extent that the MFJ 

Court has already authorized them to do so. Suggested language is as follows: 

may use inter-LATA distribution facilities only insofar as the federal District 
Court in D.C. has granted waivers of the inter-LATA restriction contained in 
the Modified Final Judgment in the case of the United States v. Western Electric 
Co. and AT&T (Civil Action No. 82-0192), as of the date of enactment of this 
Act. 

Vn. CELLULAR MOBILE RADIO SERVICES (SECTION 10 OF THE BILL) 

Section 232(b) should be deleted or revised. Considering that the FCC is already 
deliberating whether to mandate conversion to cellular equal access by aU carriers, 
Congressional action at this time is probably not needed. But, if Congress is to act, 
cellular equal access (where not required by Consent Decree) should be contingent 
upon market demand, and the FCC should be authorized to reconsider the need for 
equal access for emerging wireless technologies as they develop and are imple- 
mented. Suggested language is as follows: 

(1) When adopting rules for equal access to wireless services, the Commission 
shall consider differences in market demand in different areas, costs of conver- 
sion and other economic and technical factors, and may provide that cellular or 
other wireless carriers in those areas are required to convert to equal access 
technology within a certain period of time only after bona fide requests for the 
service are received from a material percentage of customers. 

(2) The Commission shall also evaluate the need to impose equal access re- 
quirements on new forms of wireless communications as they may be authorized 
to provide commercial service, and may exempt such new services from ecjual 
access requirements if it can be shown that they are competitive and do not pro- 
vide the carrier with a means to impede competition in the relevant market. 



256 

Vin. CUSTOMER PROPRIETARY NETWORK INFORMATION (SECTION 12 OF THE BILL) 

Section 234(b) should be modified tx) clarify that a customer's opportunity to limit 
disclosure of subscriber lists does not apply to the routine publication of telephone 
directories. Suggested language is as follows: 

Nothwithstanding subsection (a), a LEG shall provide subscriber list informa- 
tion under nondiscriminatory, and reasonable rates, terms suid conditions to 
any person upon rettsonable request. A LEG may publish directory listings, but 
if it proposes to use subscriber list information for any other commercial pur- 
pose the LEG shall provide each of its subscribers with the opportunity to pro- 
hibit or limit disclosure of his or her subscriber list information. 



Letter From Steven J. Metalttz, Vice President and General Gounsel, 
Information Industry Association 

July 26, 1993. 
The Honorable Daniel K. Inouye, 
U.S. Senate. 
Washington. DC 20510 

Dear Mr. Chairman: On behalf of the Information Industry Association (HA), 
thank you once again for your invitation to testify before the subcommittee on July 
14 on S. 1086, the Teleconununications Infrastructure Act of 1993. I am pleased to 
supplement IIA's testimony with the following information. 

Our testimony on S. 1086 focused on four critical issues: (1) the scope and implica- 
tion of the definitions contained in S. 1086; (2) the appropriateness of strong anti- 
trust protections; (3) the need for strong direction to ensure cost-based pricing of 
basic services offered by local exchange carriers and avoidance of enhanced service 
provider access charges; and (4) the importance of a clear and unequivocal state- 
ment of Federal preemption of any State utility and entry/exit regulation of en- 
hanced services. 

On July 23, HA and other groups submitted to the subcommittee staff" specific 
suggested amendments to S. 1086. These address most of the issues highlighted in 
our testimony. We believe these suggestions will clarify and strengthen the biU, and 
we urge you to give them serious consideration. 

The suggested amendments retain the terminology of "telecommunications" and 
"information service" which were employed in S. 1086 as introduced. However, the 
amendments would revise the definitions of these terms to track more closely the 
existing distinction between "basic" and "enhanced" services. As HA noted in its tes- 
timony, this distinction, whidi the FGG has employed for several years, has worked 
well. Incorporating its basic thrust into S. 1086 will provide the greatest benefit to 
users and providers alike. 

Our testimony of July 14 stressed the importance of more specific safeguards to 
assure market fairness and prevent discrimination, cross-subsidization, or other 
anticompetitive behavior. The suggested language changes submitted to the staff 
recommend suitable steps to prevent such abuses, including more detailed struc- 
tural separation and open network architecture requirements. Such clear prescrip- 
tions, coupled with fair enforcement, will improve the industry for all consumers 
and providers. 

IIA's testimony also noted the importance of customer proprietary network infor- 
mation (CPNl). The suggested language addresses both the competitive and privacy 
concerns inherent in this complex issue. It will offer broad privacy protections to 
consumers and ensure the commercial viability of CPNI to business users. At the 
same time, it provides the Commission with needed flexibility to determine how best 
to balance the interests of privacy and free flow of information, by authorizing it 
to adopt an "opt-out" approach to the dissemination of appropriate elements of 
CPNI. 

Finally, as noted by many of the witnesses at the subcommittee hearing, we sup- 
port all that this bUl can do to set the stage for improved and widespread availabil- 
ity of digital transmission facilities for all Americans. The adoption of stemdards to 
ensure the integrity and quality of the network, as proposed by the suggested 
amendments, are a key element of the effort to make the maximum benefits of ad- 
vanced telecommunications infrastructure available to rural, inner city, and all 
other markets. 



257 

HA commends the leadership that you and Senator Danforth have shown on these 
critical issues. We look forwara to working with you as this measure moves forward. 
Sincerely yours, 

Steven J. Metalitz, 
Vice President and Genercd Counsel. 



Letter From Gerald J. Kovach, Senior Vice President, External Affairs, MCI 

Communications Corp. 

September 17, 1993. 

The Honorable Daniel K. Inouye, 
U.S. Senate. 
Washington DC 20510 

Dear Mr. Chairman: On July 14, 1993, Mr. James G. CuUen, President of Bell 
Atlantic, testified before your Subcommittee's hearing on S. 1086, the Teleconmiuni- 
cations Infrastructure Act of 1993. Certain representations were offered as part and 

f)arcel of a concerted effort by the Bell Operating Companies (BOCs) to secure legis- 
ative relief from the line of business restrictions contained in the Modification of 
Final Judgment (MFJ). Mr. Cullen and others would have the Subcommittee and 
the public oelieve that the local telephone markets are subject to competition, while 
the long distance business is not. Neither of these allegations is true. 

Among the assertions made by Mr. CuUen was that interexchange carriers (DCCs) 
do not pass through to consumers the benefits of access charge reductions they re- 
ceive from local exchange carriers (LECs). To support his allegation, Mr. Cullen 
pointed to a single switched access charge filing made by LECs in April 1993. While 
that one filing did in fact result in a decrease in access charges, it aoes not support 
his conclusion. Mr. Cullen did not reveal several switched access charge increases 
made in the last year that offset that one reduction. Indeed, interstate access 
charges to the interexchange industry went up in the relevant period. Thus, the im- 
plication that IXCs had increased rates while their costs had actually declined is 
untrue. 

Since divestiture, competition has dramatically reduced the price of long distance 
service providing positive consumer benefits. In the last seven years, the largest 
DCCs as a group nave decreased prices significantly more than LECs have decreased 
access charges. Between 1985-1992, MCI estimates that overall domestic switched 
long distance rates for the three largest DCCs decreased by 43 percent more than 
reductions in related access charges. In nominal terms, long distance rates fell by 
nearly 19 cents per minute, while the LECs access charges only dropped by 13 cents 
per minute. Afler adjusting for inflation, interexchange rates fell by 53 percent more 
than comparable access expenses. Clearly competition in the long distance market 
has driven actual rates down faster than access, and suggestions to the contrary are 
false. 

Erroneous information regarding the long distance industry should not distract 
the Subcommittee from focusing on the current monopoly that the LECs, including 
the Regional Bell Operating Companies (RBOCs), maintain in the access market. Of 
the access charges paid by MCI in the last year, an overwhelming majority, 99.4 
percent, went to LECs. An infinitesimal percentage, .06 percent, went to their com- 
petitors. This fact alone places the tale of vibrant local access competition in the 
proper light. 

Not only are the RBOCs monopolists in their serving areas, but they have earned 
substantial sums from their interstate access business. In 1992, they achieved net 
income of over $3 billion from interstate access, with a return on investment of 
nearly 12.5 percent. This latter figure is a full 125 basis points greater than the 
interstate authorized rate of return which the FCC has determined is fair. Despite 
RBOC claims of being faced with competition, the facts are: they control over 99 per- 
cent of the access market; they price access very near the allowable maximum rates 
as determined by price caps; and they continue to earn excessive rates of return. 

In addition to producing dramatic pricing declines, competition in the long dis- 
tance marketplace has also been responsible for numerous service enhancements 
and new service offerings. Residential customers have access to new services, such 
as personal 800 service, and discount plans, such as MCFs Friends and Family plan. 
Business customers have been afforded specialized billing arrangements, network 
reconfiguration, and virtual private networks to satisfy increasingly sophisticated 
telecommunications needs. 

The public has been well served by the establishment and maturing of competi- 
tion in the long distance maricetplace. To promote the public interest, it is of utmost 



258 

importance that policymakers introduce competition into the local exchange maricet- 
place. MCI looks forward to working with you in these endeavors. 
Sincerely, 

Gerald J JCovach. 



Letter From James G. Cullen, President, Bell Atlantic 

September 2, 1993. 

The Honorable Daniel K. Inouye, 
U.S. Senate. 
Washington. DC 20510 

Dear Mr. Chairman: At the July 14, 1993 hearing before this subcommittee on 
S. 1086, I stated that the interstate long distance companies had not reduced prices 
to customers by the same amount that the local exchange companies have lowered 
interstate access prices. In support of that claim I attached a Merrill Lynch ana- 
lyst's report that stated: 

"In another sign of oligopolistic tendencies in the long distance (LD) business, 

AT&T has informed the FCC that it does not plan to reduce its long distance 

prices on July 1 despite the fact that its largest cost, local telco access charges, 

are scheduled to fall by at least an aimualized $250M on that date." 

AT&T, through Thomas Norris, its Executive Vice President, challenged that 

claim in an August 2, 1993 letter to this subcommittee. This letter responds to the 

misstatements contained in the AT&T letter. 

In his letter,, Mr. Norris claims that the "access charges in recent LEC filings 
have increased, not decreased, AT&T's access expenses." One look at AT&Ts 
most recent quarterly report, however, confirms that the Merrill Lynch report 
was accurate. AT&T's own report shows that its access costs for the most recent 
six months, when compared to the same period a year ago, have decreased by 
$298 million. Over the same period, AT&Ts revenues from telecommunications 
services increased by $76 million. See Attachment 1. I have also attached an 
analysis of the most recent access tariff filings by the local exchange companies 
(Attachment 2). That analysis also confirms that AT&T's rates have been re- 
duced this year by $250 million. 
These access charge reductions are not an isolated occurrence. As Figure 1 shows, 
local exchange company access prices to long distance companies have dropped sub- 
stantially and consistently since divestiture. Figure 2 shows that, even when ad- 
justed for lost market share and increased demand, AT&T's access expenses have 
decreased significantly since divestiture. Specifically, AT&T's annual access charges 
have been lowered by $10.03 billion since divestiture. Surprisingly, however, AT&T 
has only lowered its rates by $8.37 billion over the same period. When one considers 
that $310 million of AT&T's rate reduction represented FCC-mandated rate reduc- 
tions not related to access costs, AT&T has failed to pass on nearly $2 billion in 
access price reductions. 

In a truly competitive environment, changes in prices would tend to reflect 
changes in costs and not eillow providers to pocket a staggering $2 billion. As I testi- 
fied before this subcommittee, the Bell companies can add real competition to the 
long distance marketplace. Competition from the Bell companies does not nec- 
essarily mean duplicating the long distance netwoiks of the other carriers. Permit- 
ting the Bell companies to resell the services of other carriers will benefit consumers 
by giving them the information they need to choose the lowest priced carrier on 
every call instead of being stuck with one carrier for all calls. 

Thank you for this opportunity to set the record straight and I stand ready to as- 
sist this subcommittee in any further deliberations on this matter. 
Yours truly, 

James G. Cullen. 

[The attachments and figures referred to may be found in the conmiittee files.] 



259 

Lehter From Thomas H. Norris, Vice PREsroENT, Federal Government Affairs, 

AT&T 

August 2, 1993. 

The Honorable Daniel K. Inouye, 
U.S. Senate. 
Washington, DC 20510 

Dear Mr. Chairman: During recent hearings before your Subcommittee on S. 
1086, the Telecommunications Infrastructure Act of 1993, James G. Cullen, Presi- 
dent of Bell Atlantic, made several highly inaccurate and misleading statements 
about AT&T's pricing. This attempt to shift the Subcommittee's attention away from 
local exchange competition and the monopoly that his company and the other Re- 

fional Bell Operating Companies (RBOCs) enjoy in local teleconmiunications must 
e corrected. 

Mr. Cullen confused the issues raised in S. 1086 by selecting an issue that is inor- 
dinately complex, even to those in the industry. Specifically, he testified that the 
local exchange carriers (LECs) reduced access charees to long distemce carriers, or 
DCCs, by approximately $250 rnillion and that AT&T did not reduce its long distance 
prices by a comparable amount. In fact, over the recent period reflected in AT&T's 
price changes, LECs increased their switched access charges to DCCs by $20 mil- 
lion. i Mr. CuUen's statement is therefore not only a gross overstatement, it is also 
completely contrary to the actual direction of LEG access pricing. 

Mr. Cullen's first mistake was to use a single access reduction to disguise multiple 
recent DCC access charge increases and then blaming long distance carriers for fail- 
ing to pass through reouctions we never received. He further misled Members of the 
SuDcommittee by blaming AT&T for failing to pass through 100 percent of the fic- 
tional DCC access reduction. In fact, of course, AT&T pays only about 60 percent of 
DCC access chaives and could hardly be expected to account for the entire reduction 
even if therehaa been one. The basic fact remains that the access charges in recent 
LEG filings have increased, not decreased, AT&T's access expense. 

Mr. Cullen's testimony also included a chart from the February 1993 issue of 
Business Communications Review (BCR) which he claimed showed the DCC industry 
is engaged in oligopolistic pricing. He selectively used a chart but faUed to include 
the entire article, which would have disproved the precise point he sought to make. 

Had he done so, the Members of the Subcommittee would have seen that "basic 
long distance charges" as defined by the author, are the undiscounted per minute 
rates for AT&T Megacom, MCI Prism 1 or Sprint Ultra WATS for a "typical" cus- 
tomer with 1,000 hours of daytime traffic per month and include the cost of Tl ac- 
cess 24 voice grade lines) at one end. 

The very point of the BCR article was to inform business telecommunications 
managers that there is substantial competition for such services and that they can 
and should negotiate discounts off these "basic" rates. The author wrote, "Tariffed 
or not, today's basic long distance service prices are just a starting point (my empha- 
sis) in determining what your particular company might pay." This point is con- 
stantly reiterated throughout the article with further statements such as "base rates 
are Just the 'sticker price'; pricing plans and special deals make the difference." 

Nor are customers for the services whose base rates were charted representative 
of customers in general. But, in any case, every residential and business customer 
has a plethora of discount plans available, from AT&T's i plan to Sprint's The Most 
to MCI's Friends and Family to Tariff 12 and its clones. Customers have unique re- 
quirements, and Mr. Cullen s implication that long distance pricing can be described 
accurately in one chart shows either a deliberate attempt to confuse or a gross mis- 
understanding of how long distance competition works. 

K Members of the Subcommittee and other policy makers are distracted by spe- 
cious arguments such as Mr. Cullen's, they will fail to focus on the real problem 
and public policy need — the absence of competition in the local information infra- 
structure. It is noteworthy that nowhere in his testimony or rebuttal did Mr. Cullen 
refute the fact that the entire DCC industry is totally dependent on the LECs for 
access to our customers. Well over 99 percent of AT&T's access expense in 1992 
went to the LECs; only $19 million out of $14 billion, or 0.14 percent, went to their 
competitors while 99.86 percent stayed with the LECs. 

The debate in Congress is, properly, how to ensure that competition flourishes in 
all segments of the telecommunications and information industry. Competitive con- 
ditions already exist in the interexchange industry and need to be established, if 



lA $250 million reduction in switched access charges to the IXC industry was made as Part 
of the LECs' annvial tariff filing effective July 1, 1993. But the $250 million number reduction 
in carrier switched access was more than offset by $270 million increases in access expenses. 



260 

possible, in non-competitive segments — notably that of local exchange telephone 
companies. 

AT&T looks forward to contributing to the fact-finding and deliberations of the 
Subcommittee and full Committee. You may rely on us to furnish facts as clearly 
as we know how. 
Sincerely, 

Tom Norms. 



ATTACHMENT A 

Below are LEG access expense changes that have an impact on the entire LEG 
access customer base. AT&T's Price Gap Regulated Basket 1 and 2 Services are a 
subset of this total. LEG access chai^ge changes affecting AT&T's Price Gap Regu- 
lated services are referred to as "TDelta Y", and serve as mput to AT&T's Price Cap 
Indices (PCT). AT&T's PCI is typically updated twice per year to include accumu- 
lated LEG access changes, inflation (GNP-PI), imd FCC sanctioned exogenous cost 
adjustments. Delta Y is computed using 1992 Base Period Price Gap volumes and 
is relegated to AT&T's Price Gap Baskets using an "As Allocated" methodology con- 
sistent with FGG Docket 87-313 rules. 



SWITCHED ACCESS CHARGE 
CHANGES 


EFFECTIVE DATE 


ESTIMATED IXC 
INDUSTRY 


IMPACT ($M) 








LEC INFORMATION DATABASE 


FULLY DEPLOYED 
MID, 1992 


$100 




GTE CCL INCREASE (TRANS. 
#778) 


2-Apr-93 


$33 




LEC 800 NUMBER PORTABILITY 


1-Mav-93 


$74 


LEC ANNUAL ACCESS FILING 


1-Jul-93 


($250) 


GENERAL SUPPORT COSTS 
REALLOCATION & UNIVERSAL 
SERVICE FUND ADJUSTMENTS 


1-Jul-93 


$63 


*SUM OF ACCESS CHARGE 
CHANGES 




$20 



LEGs reduced total access expenses by $184 million in their annual filing. The 
net reductions to industry switcned access services were $250 million, apportioned 
to switched access categories as follows: carrier common line charges reduced by 
$229.1 million, switched traffic sensitive charges reduced by $21.1 million. (Note: 
LEC Information Database charge changes were absent from AT&T's prices during 
1992) Including the additional access charge changes, industry switched access ex- 
penses increased by $20M. AT&T has included approximately $9M worth of LEG 
switched access chaise changes in its recent PCI filing. 



Prepared Statement of Association of Telemessaging Services, 

International 

On behalf of the Association of Telemessaging Services, International ("ATSF), we 
welcome and appreciate the opportunity to submit this statement regarding S. 1086, 
the Telecommunications Infrastructure Act of 199 3, as it relates to Customer Pro- 
prietary Network Information ("CPNF). As owner of C&J Telecommunications, Inc., 
which provides live answering services in Honolulu, Hawaii, and President of Avail- 
able Gonununications, Inc., which provides voice and live answering services in St. 



261 

Louis Missouri, respectively, we are keenly aware of the importance of this matter 
to our businesses, and we support restrictions on the use of CPNI.i 

ATSI is the onJy national trade association representing the voice maU and live 
answering industry. As the Washington eyes, ears, and voice of the telemessaging 
industry for over 50 years, the association's roots are in live telephone answering 
services. With industry growth and progress, so too has the association grown to in- 
clude businesses that also offer a wide variety of telemessaging services such as 
voice messaging, paging, and fax services. 

Before presenting our association's views on CPNI, we would like the Subcommit- 
tee to consider the following scenario: Imagine, if you will, that you are competing 
for re-election with only one opponent in your District. Now imagine that one person 
has but a single advantage: He or she is also the registrar of voters. Only he or 
she knows the make-up of each household — ^how many qualified voters, how they 
voted, if they vote independently or the party line, who they voted for, those imiwr- 
tant socio-economic demographics of age, education, habits — maybe even zip c»de — 
that help you better understand the needs of your constituents. Now take this un- 
fair advantage just two steps further: The voters must personally ask for their bal- 
lots from your opponent! And vou don't have this information! 

That's not unlike the unfair advantage that the telephone companies enjoy 
through the unlimited and unregulated use of CPNI. 

CPNI is more than an abstract telecommunications acronym to us and our indus- 
try. Under the FCC's current regulations, the Bell Operating Companies ("BOCs") 
enjoy virtually unlimited and unregulated use of CPNI, an important tool the BOCs 
use to gain an unfair advantage over other information providers in identifying, 
targeting, marketing, and selling their own enhanced services to potential cus- 
tomers. Defined by 3ie FCC to include "all information about a customer's network 
services and the use of those services that a Bell Operating Company (BOC) pos- 
sesses by virtue of its provision of network services," CPNl includes information 
such as: what types of regulated services a customer uses; the number and identity 
of the customers service locations; when and where a customer calls and how long 
he speaks, the amount of the customer's monthly telephone service bills; and, how 
much a customer uses the different regulated services to which he subscribes. 

It is also important to note what CPNI does not include, because the BOCs often 
have used this information without giving customers any opportunity to object, and 
without making it available to competing information providers. Under the FCC's 
rules, the BOCs are free to exclude from CPNI a customer's name, address, tele- 
phone number, credit information, and information regarding a customer's use of 
non-regulated services. 

TherCC's CPNI rules allow BOC information services personnel to obtain this 
valuable information at will — unless the customer first objects. However, unaffili- 
ated vendors, such as our colleagues among the telemessaging providers, cannot ob- 
tain this same information unless they first secure the customer's affirmative per- 
mission. In other words, affirmative action must be taken by the consumer before 
a BOC competitor may obtain information that the BOC may obtain at wUl. 

And perhaps the most insidious portion of these so-called "safeguards": The BOCs 
don't even have to notify residential and single-line business customers of their 
right to prevent disclosure of their proprietary network information. The FCC's 
rules merely require the BOCs to notify business customers with more than 20 lines 
of their CPNI rights. 

CPNI is both highly confidential and competitively significant, and the FCC's 
rules gives the BOCs a substantia' marketing advantage. CPNI and related infor- 
mation can be used to: 

• identify new potential customers, such as subscribers moving into the area or 
adding service locations, before competitors become aware of them; 

• prepare highly effective marketing presentations based on usage information, 
such as the nun^er of missed or blocked calls, that is unavailable to competitors; 

• engage in more timely and cost-effective marketing because they need not se- 
cure customer authorizations; 

• readily identify the appropriate customer contact, while competing vendors 
often experience substantial delay in doing so; 

• identify customers who currently use competing vendors by matehing up the 
CPNI of vendors and customers; 



1 Our support of the bill's proposed restrictions on the use of CPNI is based on our under- 
standing that the bill s prohibition on disclosure by a "telecommunications carrier" of "any cus- 
tomer proprietary network information to any person" without customer consent, would preclude 
a telephone operating company from disclosing CPNI to its own voice messaging operation, 
whether operating within the same corporate entity or through an afRliate. 



262 

• enjoy virtually unrestricted access to the CPNI of residential and small busi- 
ness customers; and 

• spare the expense of obtaining data — such as credit information — from external 
sources, while their competitors must do so. 

lliese rules have been used in an anticompetitive fashion to discriminate against 
our industry, and in many ways, the American public. For example: 

• In Albuquerque, New Mexico the local BOC, using CPNI, contacted businesses 
using answering services and urged them to switch their business from the answer- 
ing service to the BOC. How were they able to identify these customers? Through 
CPNI! 

• In Denver, Colorado, Alert Telephone Answering Service, Inc., keeps detailed 
records of customers lost to "poaching" by U.S. West solicitations. For example, cus- 
tomers of competitors have been told that U.S. West would waive installation 
charges on its voice messaging service. Also, messaging customers have been solic- 
ited for U.S. West's voice messaging service when they call to request the removal 
of call waiting, a relocation of service to another address, or the addition of phone 
or fax Unes at existing addresses. The manager of one telephone answering company 
who called U.S. West to report loss of service on her telephone was offered a free 
trial of U.S. West's voice messaging in lieu of credit on her telephone bill. How did 
the telephone company know that there was a credit on this person's bill? Through 
CPNI! 

• In Wilmington, Delaware, a customer who asked Diamond State Telephone 
Company to have call forwarding put on his phone line so that his calls would be 
answered by Phonepower, Inc., learned upon checking his new service that Diamond 
State had hooked him up to their own "Answercall. How did they know he was a 
good credit risk? How did they know he was the appropriate contact? Through 
CPNI! 

• In St. Louis, Missouri, one of our members received a direct mail piece medled 
to his home promoting Southwestern Bell's Messaging Service. He pays an addi- 
tional amount for a non-published number, and has the expectation that this num- 
ber will not be given to the public or used for sales solicitation. In this case. South- 
western Bell utilized the non-published CPNI information for solicitation by their 
voice mail subsidiary. They even state in their direct mail that "well call you in 
a few days." Utilizing the non-published data base to get the telephone numbers for 
the telephone calls means that they used CPNI! 

• And in Boston, a customer to whom a member sold an answering service, con- 
tacted New England Telephone (part of NYNEX) to have call forwarding put on her 
phone so that she could forward her calls to our service. She later called the mem- 
ber back to say that she wouldn't be taking Ansaphone's service after all. She was 
going to wait a few months until New England Bell installed their answering serv- 
ice in her area. Clearly this was a case of New England Telephone pre-seUing a 
service that didn't currently exist in that area. How did they know that she would 
be a good customer? Through CPNI! 

We strongly support the Subcommittee's efforts to develop legislation to correct 
these inequities. The Subconunittee's draft legislation would place the BOCs and 
their information provider competitors on equal footing when competing for new 
business opportunities. 

In considering S. 1086, we urge the Subcommittee to focus on the following ques- 
tions: 

1. Can the government achieve a competitive, vibrant telecommunications market 
if the government affords one player in the enhanced services market the kind of 
marketing advantage obtained from preferential access to customer proprietary net- 
work information? 

2. Should a single competitor in the information services market be subsidized by 
information obtained from, and paid for by, rate payers? 

3. What kind of government telecommunications policy will invite small busi- 
nesses to participate in the information infrastructure? 

4. And what would happen to America's freedom of choice and voting rights as 
we know them today if the same rules that apply to CPNI were applied to elections 
in your District? 

On behalf of the entire telemessaging industry we urge Congress to restrict the 
use of CPNI for marketing purposes, so that a telephone operating company could 
disclose CPNI to afliliated or unafliUated providers of unregulated services only if 
required by law, or if the customer requests disclosure of the information for itself 
or for a service provider designated by the customer. 

Thank you. 



263 

Letter From Charles H. Tower, Coordinator, Electronic Pubushing Group 

July 28, 1993. 

Senator Daniel Inouye, 
U.S. Senate. 
Washington, DC 20510 

Dear Chairman Inouye: The Electronic Publishing Group, a coalition of those in- 
volved in electronic information content creation and distribution, strongly supports 
the overall thrust of S. 1086. 

We regard the biU as a major step forward in the development of a widely avail- 
able telecommunications infrastructure based primarily on marketplace competition. 
This, in turn, will encourage the expanding competitive diversity of information 
products' and services which should be the hallmark of the information age. 

While we have a substantial general interest in all parts of your bill, our particu- 
lar concern relates to Section 12. That section deals with the privacy of customer 
proprietary network information, often referred to as CPNI. 

I am enclosing with this letter a suggested redraft of Section 12 of S. 1086. We 
believe that our proposed changes wUT clarify and strengthen this section of your 
bill. They aie similar to those recommended by two of the larger electronic informa- 
tion industry associations, ITAA and DA. 

The bi-partisan leadership which you and Senator Danforth have provided in the 
development of this important legislative proposal and the dedicated effort of both 
majority and minority staffs working together deserve the recognition and support 
of your colleagues. We shall do all we can lo bring about that result. 

We request that this letter and the enclosure be made part of the record now 
being developed in your Subcommittee's consideration of S. 1086. 
Respectfully yours, 

Charles H. Tower. 



amendment to the communications act of 1934 

[Bold is deleted material and italic is added material] 

Sec. 234. Privacy of Customer Proprietary Network Information. 

(a) Privacy Requirements for Telecominiinications Local Exchange Car- 
riers. — A teleconununications local exchange carrier — 

(1) shall not disclose any customer proprietary network information to any person 
that is engaged in the provision of other than telecommunications services, except — 

(A) as required by law; or 

(B) upon afilrmative written request by the customer to which it relates; or 

(C) pursuant to rules established by the Commission, if— 

(i) such information is of a type that the Commission has determined may be gen- 
erally disclosed without raising substantial customer privacy concerns; and 

(ii) the local exchange carrier has provided notice to its customers of the general 
availability of such information and of the opportunity to object to such disclosures; 

(2) shall disclose such information, upon affirmative written request by the cus- 
tomer, to a service provider designated by the customer; 

(3) shall, whenever such telecommunications local exchange carrier provides 
any aggregate information based on customer proprietary network information or 
any data base or other compilation of customer proprietary information to any per- 
son, notify the Commission of the availability oi such aggregate or compiled infor- 
mation on the same reasonable terms and, conditions, and price to any other serv- 
ice provider upon reasonable request therefor; and 

(4) shall not discriminate between affiliated and unaffiliated service providers in 
solicitirig consents regarding, providing access to, formatting, categorizing, collecting, 
compiling, aggregating or disaggregating, indexing, or in the use and disclosure of, 
individual and aggregate or compiled information made available consistent with 
this subsection; and 

(5) shall ensure that its own or any affiliate's information service personnel no 
longer have access to, or use of, directly or indirectly, any customer proprietary net- 
work information that was disclosed to such personnel without the customer's affirm- 
ative written request before the effective date of this section. 

(b) Provision of Subscriber List Information. — Notwithstanding subsection 
(a), a local exchange carrier shall provide subscriber list information under non- 
discriminatory and reasonable rates, terms, and conditions to any person upon rea- 
sonable request. A local exchange carrier shall provide each of its subscribers with 



264 

the opportunity to prohibit or limit disclosure of his or her subscriber list informa- 
tion. 

(c) Definitions. — As used in tliis section: 

(1) The term "customer proprietary network information" means — 

(A) information whidi (i) relates to the quemtity, technical confi^ration, type, 
destination, and amount of use of telecommunications service subscribed to by anv 
customer of a telecommunications carrier local exchange carrier, and (ii) is avail- 
able to the telecommunications carrier local exchange carrier by virtue of the 
telecommunications carrier local exchange carrier-customer relationship; 

(B) information contained in the bills for telecommunications service received by 
a customer of a telecommiinications carrier local exchange carrier; and 

(C) such other information concerning the customer as is (i) available to the tele- 
communications carrier local exchange carrier by virtue of the customer's use of 
the carrier's services, and (ii) specified as within the definition of such term by such 
rules as the Commission shall prescribe consistent with the public interest. 

(2) The term "ageregate information" means collective data that relates to a 
group or category oi services or customers, from which individual customer identi- 
ties or characteristics have been removed. 

(3) The term "subscriber list information" means information identifying a local 
exchange carrier subscriber's name, telephone number, address, billing name and 
address, or primary directory advertising listing, or any combination thereof. 

(d) Rulemaking Schedule. — The Commission shall, within 90 days of the enact- 
ment of this section propose, and within 270 days of enactment adopt rules that: 

(1) implement the requirements of this section, including 

(A) specifying the types of customer proprietary network information that may be 
generally disclosed witnout raising substantial customer privacy concerns; and 

(B) specifying the types of customer proprietary network information that may not 
be disclosed absent a requirement of law or affirmative written request by the cus- 
tomer to which it relates; and 

(2) ensure that any customer proprietary network information or aggregate or com- 
piled information or data base made available to an unaffiliated service provider 
shall be in such form as the provider shall reasonably request. 



Letter From William L. Weiss, Chairman and CEO, Amerttech 

October 20, 1993. 

The Honorable John C. Danforth, 
U.S. Senate, 
Washington, DC 20510 

Dear Senator Danporth: On behalf of the seven regional companies, I am re- 
sponding to the request you put to me and Bob Allen at the hearing on September 
8 to develop a definition of local exchsmge competition. I hope the following informa- 
tion is helpful to you and the Subcommittee as you continue your deliberations on 
S. 1086. 

In developing a definition of local exchange competition, we must first determine 
the purposes for which such a standard might be used. Tests for competition have 
been developed, as in the cable reregulation legislation, to determine the appro- 
priate level of regulation, of the prices of a telecommunications provider. For exam- 
ple, Illinois law provides the following standard of efiective competition which, when 
met, relieves a provider of a service of certain regulatory pricing burdens: 

"Competitive Telecommunications Service means a telecommunications serv- 
ice, its mnctional equivalent or a substitute service, which, for some identifiable 
class or group of customers in an exchange, group of exchanges, or some other 
clearly defined geographical area, is reasonably available from more than one 
provider. 220 IlI^S 5/13-209. 
This type of test is not appropriate as a test for entry into a market. An entry 
test, based on antitrust principles, must focus on conditions in the market that one 
is seeking to enter. The Modified Final Judgment (MFJ) provides just such a test. 
Recognizing that excluding a competitor from a market harms consumers, the MFJ 
provides that the line of business restrictions, including the long distance prohibi- 
tion, shall be removed when there is "no substantial possibility that a (regional com- 
pany) could use its monopoly power to impede competition in the market it seeks 
to enter." This standard ooes not require the elimination of the local exchange mo- 
nopoly. Indeed, it assumes the continuation of substantial market power, ii not a 
de jure monopoly. Instead, relief is mandated if there is no substantial possibility 
that any existing monopoly power in the local exchange will impede competition in 
the market the local exchange company seeks to enter. The Court of Appeals has 



265 

interpreted "impeding competition" to mean the abUity to increase price or restrict 
output. This means, for example, that there must be a significant threat that the 
regional companies will dominate the long distance market. 

The regional companies believe that existing conditions in today's telecommuni- 
cations marketplace satisfy the test for entry set out in the MFJ. Regardless wheth- 
er the Subcommittee agrees with that proposition, there can be no doubt that the 
unbundling requirements of S. 1086 justify the elimination of the long distance ban. 
It is Ameritech's position that the unbundling requirements of S. 1086 reduce bar- 
riers to entry and eliminate any remaining ailment that the regional companies 
could act anti-competitively in the long distance business. 

Predatory pricing by the regional companies in the long distance market is not 
feasible due to the scale economics of long distance carriers such as AT&T, MCI, 
and Sprint, and the fact that the regional companies would start with zero market 
share. Such a pricing strategy would fail because the long distance carriers could 
withstand any losses from matching below cost prices and could not be driven from 
the market. Access discrimination would be impossible to implement due to the cur- 
rent equal access regulations in place and the unbundling provisions of S. 1086 bill 
which would make any attempted discrimination much easier to detect. Accordingly, 
the seven regional companies urge the Subcommittee to mandate long distance relief 
in S. 1086. 

For this Subcommittee to establish a new test for long distance entry based on 
market metrics raises several concerns. First, local exchange competition will occur 
at different times for different groups of customers in different geographic eu-eas. 
This has already been the experience in the development of long distance competi- 
tion. To permit entry by the regional companies only to those customer groups and 
geograpWc areas for which competition exists — whether defined as the existence of 
a substitute service or some specified level of market share — will result in piecemeal 
entry that will not be in the best interests of consumers. This approach will increase 
customer confusion as to what carriers provide such services a at given point in 
time, and could cost consumers millions of dollars in foregone savings that would 
result from full regional company entry. Even worse, delaying entry until some over- 
all metrics is satisfied will delay entry in the most contestable arena far beyond any 
reasonable time. Ironically, a metrics test has the effect of placing the public policy 
decision of competitive entry into the hands of the incumbent providers who can 
control the entry of competitors into their own businesses by their decision as to 
whether or not, and on what scale, they choose to enter the local exchange business. 
These effects conflict with the main objective S. 1086 — to facilitate the development 
of universal access to an advanced telecommunications infrastructure. 

In addition, continued or piecemeal exclusion of the regional companies from the 
long distance market would have a serious impact on the types and quality of serv- 
ices offered to consumers. For example, Ameritech has developed the Wisconsin 
Health Information Network (WHIN), linking doctors, hospitals, and insurance car- 
riers in a network that reduces the cost of health care services while increasing the 
responsiveness of the industry to the health care needs of Wisconsin. As the current 
debate over health care attests, this type of service is critical to our nation's ability 
to provide quality health care services to all Americans. Other of the regional com- 
panies are offering or are planning to offer similar services. Due to the long distance 
restriction, the regions are unable to serve smaller, less populated areas because of 
the hi^ cost of replicating a network for each area. As a consequence, the benefits 
derived from WHIN will be provided only to people in the larger cities of Wisconsin, 
such as Madison and Milwaukee, while people in less populated areas — those in the 
greatest need of improved health care services — are excluded. Removal of the long 
distance restriction would allow the regions to serve less populated areas using fa- 
cilities based in lai^er cities, thus extending the full benefits of the network to all 
consumers and reducing the costs to everyone. 

In conclusion, we urge the Subcommittee to recognize that opening all markets 
to aU competitors offers the best hope of developing the nation's telecommunications 
infrastructure for the benefit of all citizens and therefore, to amend S. 1086 to elimi- 
nate the long distance ban of the divestiture decree. 
Sincerely, 

W.L. Weiss. 



266 

Letter From Robert E. Allen, Chairman of the Board, AT&T 

October 5, 1993. 

Senator Daniel K. Inouye, 
Senator John C. Danforth, 
U.S. Senate. 
Washington. DC 20510 

Dear Senators Inouye and Danforth: As promised at your September 8th 
hearing on S. 1086, I am pleased to provide you with legislative language, which 
we believe appropriately defines "effective competition" in local telephone services. 
While we have discussed the language and sought input from several industry par- 
ticipants, the nroposal is AT&T's alone. Other parties may wish to comment or sub- 
mit their own language. 

I have asked my Senior Vice President and General Counsel, John Zeglis, and 
Mike Brown of our Washington Office, to work with your staff in developing lan- 
guage for the bill. I appreciate your interest and personal involvement in these im- 
portant issues. 

Very truly yours, 

R.E. Allen. 



INTEREXCHANGE services (SECTIONS 9 & 10) 

Add a new provision (to section 231 or 232), as follows: 

"(a) Except as provided in these sections, no Bell Telephone Company or affil- 
iate of a Bell Telephone Company shall engage in the provision of interexchange 
telecommunications services. 

"(b) No earlier than seven (7) years after the enactment of this section, a Bell 
Telephone Company may petition to the Commission for authorization to pro- 
vide interexchange telecommunications services. 

"(c) The Conunission may grant authorization to a petitioning Bell Telephone 
Company to provide interexchange telecommunications services upon a showing 
by the Bell Telephone Company (i) that there is no substantial possibility that 
the petitioning Bell Telephone Company or its affiliates could use monopoly 
power to impede competition in the provision of any interexchange tele- 
communications services and (ii) that effective competition in telerfione ex- 
change and exchange access services exists in the region in which the Bell Tele- 
phone Company provides telephone exchange and exchange access services. Ef- 
fective competition can be found to exist only if: 

"(1) all the regulations required by section 229 of this Act have been 
adopted by the Commission and the States and the requirements of sub- 
section 229(c) and number portability have been fully implemented by the 
Bell Telephone Company and its affiliates in the exchange areas of the Bell 
Telephone Company; 

"(2) 30 percent or more of the telephone subscribers in the exchange 
areas of the Bell Telephone Company obtain telephone exchange and ex- 
change access services exclusively from an alternative provider; and 

"(3) 75 percent or more of the telephone subscribers in the exchange 
areas of the Bell Telephone Company may obtain, from two or more alter- 
native providers, telephone exchange and exchange access services that are 
like the services of the Bell Telephone Company and comparable in quality, 
coverage, price and capability. 
"(d) The determination by the Commission regarding an application made 
under subsection (c) shall be final unless, within 60 days after such determina- 
tion, any person injured by the determination commences a civil action against 
the Commission in the district court of the United States for the District of Co- 
lumbia for a de novo determination regarding the authorization. The Court 
shall enter judgment granting authorization only to the extent it finds the Bell 
Telephone Company has made the showing required by subsection (c). A judg- 
ment entered under this paragraph shall be stayed until any appeals from the 
judgment have been exhausted or the time for filing appeals has expired. 
"(e) DEFINITIONS.— As USED IN THIS SECTION: 

"(1) The term "alternative provider" means a provider of telephone ex- 
change and exchange access services 

"(a) that is not affiliated with the Bell Telephone Company providing 
such services in that area continuously since January 1, 1984, and 
"(b) that provides exchange and exchange access services 



267 

"(i) that are like those provided by that Bell Telephone Company 
without HMJcing use of the switching, transmission or othtr facili- 
ties of that BellTeleohone Company, and 

"(ii) that permit tne alternative provider's subscribers to place 
and receive calls to and from any oi its other subscribers without 
making use 6f the switching, transmission or other facilities of that 
Bell Telephone Company, and 

"(iii) that provide its subscribers with exchange access to 
interexchan^ carrier networks without making use of the switch- 
ing, transmission or other facilities of that Bell Telephone Com- 
pany. 
"An alternative provider may interconnect with facilities of the Bell 
Telephone Company solely for the purpose of allowing calling between 
telephone subscribers of the altemativs provider and those of the Bell 
Telephone Company. 
"(2) The terms "exchange access", "exchange area", "interexchange car- 
rier", and "interexchange telecommunications services" all have the mean- 
ing given those terms m the Modification of Final Judgment and judicial 
decisions interpreting that judgment." 

DESCRIPTION OF EFFECTIVE COMPETITION AMENDMENT 

(a) No interexchange services would be permitted without passing the test, except 
for the current cellular and video authority in the bill. 

(b) A seven (7) year waiting period is required to permit time for local competition 
to develop. During this time the RBOCs' incentives to open their local networks 
would not be diminished by anticipation that interexchange relief is imminent. This 
time frame will allow for the adoption of state and federal regulations to open local 
networks to competition, the development of a new universal service structure, and 
implementation and networic re-engineering by the telephone companies. Seven 
years is a reasonable time for competition to develop from essentially a standing 
start and was, in fact, proposed last year in the House (HJl. 5096). 

(c) Any FCC approval requires passing an efTective competition test and the cur- 
rent decree's "impeding competition" requirement. Both are important. The former 
would have the FCC find that effective competition has replaced monopoly in local 
services. The latter would guarantee the Commission an opportunity to examine 
whether, notwithstanding compliance with the effective competition metrics, other 
factors indicate that the RBOCs remain a threat to the continuation of vigorous 
interexchange competition. 

The effective competition provision requires: 

1. Full implementation by the local Bell Company of the open network and num- 
ber fwrtability provisions in Section 229 of the bill; 

2. 30 percent of subscribers actually relying upon alternatives to the BeU Com- 
pany in its region; and 

3. Two or more competitors offering services like those of the Bell Company to 
75 percent of subscribers in the region. 

(d) De novo court review permits the court and case law to play its proper role. 

(e) An "alternative provider^ is defined as a full facilities-based competitor for the 
Bell Company, using only its own connections to the customer, switching and local 
transport. Arrangements would be permitted for calling between the systems. K 
competitors continue to be dependent on the local telephone company to offer serv- 
ices to customers, then true competition will not have developed. 

Four other terms ("exchange access", "exchange area", 'interexchange carriers" 
and "interexchange telecommunications services") are defined with reference to the 
MFJ as is now done with "LATA," again utilizing existing case law. 



Questions Asked by Senator Pressler and Answers Thereto by AT&T 

QUESTIONS FOR PANEL 1 

I am concerned not only with access to affordable phone service. I care about the 
quality and diversity of services available in small states like South Dakota. If ac- 
cess to the information superhighway becomes an essential means of fiiUy partici- 
pating in society, we may need to redefine universal service. 

Question. What services do you think should be universally available? 

Answer. The universal service obligations of the local exchange carriers have 
typically included provision of voice grade dialtone, repair service, and annual white 
pages directories. Teleconununications services in the future will be increasingly 



268 

more multimedia in nature, mixing voice, data and video to the home. It is difficult 
to predict what new services may eventually be considered part of "Tjasic service" 
in the future, but it is reasonable to expect that at least some local exchsmge serv- 
ices will depend on increased bandwidth in the local loop, central office digital 
switches, and interoperable networks. 

Question. What level of competition can we expect to see in smaller states? 

Answer. If broad-based local exchange competition were to become feasible, it 
would be likeW to come first to the more densely populated metropolitan areas of 
the country. However, rural areas would be apt to be affected as well. The level of 
competition would be dependent in part on the pace at which legal and regulatory 
barriers to competition are removed. These barriers include — but are not limited 
to — franchise and ri^t-of-way restrictions that advantage the incumbent local ex- 
change carrier, the mabUity of customers to change local carriers while retaining 
their current local telephone number, lack of reasonable arrangements for alter- 
native carriers to interconnect with the incumbent carrier, and regulated pricing 
structures that subsidize local rates. The pace at which these barriers are removed 
in rural areas would have to reflect the continuing need to preserve universal serv- 
ice objectives. 

Question. What is the best way to ensure that we do not become a nation of infor- 
mation haves and have-nots? 

Answer. The goals of infrastructure development and nationwide access to new 
services in both metropolitan and rural areas can best be achieved by a regulatory 
process that encourages competition while protecting targeted hi^ cost rural cus- 
tomers. Universal service requirements ensuring that local exchange carriers pro- 
vide access to the networks and services of long distance carriers and alternative 
providers, through interoperability and open interconnection requirements, will en- 
sure that all customers have access to information-rich services without regard to 
their location. 

Already there have been significant efforts to modernize rural exchanges. The Na- 
tional Exchange Carriers Association (NECA) has found that current trends in rural 
infrastructure investment indicate that by 1994, 97 percent of the central offices of 
the 1,000 small companies surveyed will have conver